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Paying high prices for underperforming investments is something nobody enjoys. It’s crucial to understand the charges associated with each investment. The expense ratio, a standard measure, calculates the portion of a fund’s assets used for administrative and operating expenses. While the fund’s prospectus outlines this, a quick web search can also reveal the calculation. The calculation is simple, see below:
Total fund costs encompass various elements such as custodial services, legal, accounting, auditing, bookkeeping, taxes, and management fees. Fund assets, including real property, cash, securities, or any other asset or receivable, contribute to these costs.
Expense Ratios Example
Actively managed funds, like mutual funds, typically have a significantly higher expense ratio compared to passively managed funds, such as index funds. Consider the Vanguard Growth and Income Fund Investor Shares (VQNPX) with an expense ratio of 0.36% versus the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) with an expense ratio of 0.04%.
Understanding the Significance
Although the numbers in the example may not appear substantial, the mutual fund is almost 9 times more expensive than the index fund. It’s crucial to grasp the portion of returns an investor is paying for the investment.
Determining a Good Expense Ratio
Finding the right investment requires research. Expense ratios vary from 0.01% to 1.25%, but a simple rule of thumb is to aim for an expense ratio below 0.5%.
In Summary
Investors are charged expense ratios for owning index and mutual funds, with mutual fund ratios generally being higher. At Gamepick, our objective is to identify funds offering optimal returns while minimizing costs.