April 20, 2015 Admin | April 20, 2015 What costs go into making up the expense ratio on a mutual fund? Why should you care?
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To keep a mutual fund going there are some costs that can’t be avoided like costs to keep the computer programs running to actually purchase the stocks and track the money. These fees are also needed by Vanguard and is what makes up their expense ratios. The higher expense ratios charged by actively managed mutual funds is to pay the salary of fund managers. This is said to be for their “expertise” that will yield you higher than average returns. The issue is that usually actively managed funds will end up with lower returns than index funds. This will decrease your yield. Add that to the fact that the higher expense ratio will reduce your returns further. You should stay away from actively managed funds.
The expense ratio represents the percentage of a fund’s assets that will be taken out and put toward the expense of running that fund. The expense ratio covers costs like the advisory fees, administrative costs, distribution fees, and other operating expenses, all wrapped up into one number. This is an important number to know because it is the amount of money that will be taken off the top of your returns. This means that the higher your expense ratio, the lower your returns. You should look for funds with the lowest expense ratio possible and also stay away from managed funds. Managed funds are advertised to ‘give you the advantage of an expert opinion’, but this only drives your expense ratios even higher and gives one more person a part of your returns.
Well said. I have nothing to add. Nice work!