Understanding the Expense Ratio and How It Affects Your Investments

When it comes to anything in life, you don’t want to pay more for anything if you don’t have to. Not wanting to pay for anything you don’t have to is also true with investing.

High returns are certainly an eye-catching statistic. They are a significant factor when deciding where to invest your money. However, there is a bit more to it.

The flip side of it is how much its costs you to invest in any particular fund. That’s where the expense ratio comes in.

An expense ratio can most easily be defined as the cost for a fund to operate vs. its assets’ total value. Think of any fund as a business.

Determining a fund expense ratio is relatively simple. Take the total of the operating expenses and divide that by the fund’s net asset value or NAV.

If you are interested in a few funds, lower expense ratios make an excellent secondary factor. Would you rather invest in a fund that charges you 1% or 1.25%?

Now that you know about expense ratios and how they can change your investments, where do you find them? Well, the good news is that they are relatively easy to find.

Funds are required to make them known to investors, so we’re not talking about hidden fees here. There are a few ways potential investors go about determining a funds expense ratio.

The primary way and likely the easiest can be done using your brokerage accounts. When looking up any fund, you’ll typically see many of its attributes along with it.

Another way to find the expense ratio is to find the fund’s prospectus. A prospectus is an overview of a fund’s investments. It needs to be filed with the SEC and sent to investors each year.

Doing a quick and simple search for a stock ticker plus the words “expense ratio” will quickly find you the information you need.

Your investment strategy comes down to how active or passive you want to get with your investments. Over the long haul, actively managed funds don’t typically outperform index funds.

You can always take on a hybrid investment portfolio. You can invest most of your money with index funds while investing in a few mutual funds to see higher gains.

A fund’s expense ratios help us understand the costs of investing in any particular mutual fund or ETF. Actively managed mutual funds need to cover their expenses.

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