HOW DOES THE EXPENSE RATIO AFFECT INVESTMENT RETURN?
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While a difference of a percentage or so between two
very similar funds may not seem significant to a small investor in
any given year, this difference can be very significant to a large
investor or even to a small investor over time. For example, a fund
with a return of 5 percent and an expense ratio of 1.25 percent
would report a cost of $12.50 on a $1,000 investment at the end of
the first year; but by the end of the tenth year, the cost would
grow to more than $150.
If investors have a good relationship with a trusted
broker or want to be able to move assets between different family
funds, they may be willing to invest in a fund with a higher
expense ratio. If two funds with the same objective have
significantly different return histories, perhaps the expense ratio
can shed some light on that. But all other factors being equal (and
they seldom are), a mutual fund offering a lower expense ratio
usually will show a better return over a mutual fund with a higher
Now a few concluding remarks.