WHAT IS AN EXPENSE RATIO?
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expense ratio is simply the percentage of your mutual fund
investment that goes to pay managing fees and operating costs. This fee is
subtracted from the assets of the fund.
Investors should not confuse the expense ratio with sales fees or
commissions of any kind. All mutual funds have an expense ratio—regardless of
whether they are load funds that charge a sales fee at the
beginning or end of your investment period, or no-load funds
that have no attached sales charges. (Load funds pay sales commissions or fees
to the brokers, financial planners, bankers, or other representatives who sell
you their funds.)
The expense ratio has become an issue for some investors because
the expense may at first seem hidden from view. While a fund often touts its
returns in promotions and newsletters, the expense ratio may be less visible,
especially to new investors.
The amount of the expense ratio is another issue. Higher expense
ratios generally go hand-in-hand with more actively managed funds or funds in
very specialized areas. Index funds, on the other hand, tend to have lower
expense ratios, since they aim to simply replicate the results of the Standard
& Poor's 500 or another index. Yet there are funds that have increased their
fees at a time when their returns were declining. In an ideal world, higher fees
would always correspond to greater management ability and better returns;
however, that has not always been the case.
Now that you know what the expense ratio is, how do you