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The best way to see if a mutual fund has competitive costs is to compare them to the ICI’s benchmark expense ratios mentioned earlier: 0.44% for equity mutual funds and 0.37% for bond mutual funds.
One notable component of the expense ratio of U.S. funds is the "12b-1 fee", which represents expenses used for advertising and promotion of the fund. 12b-1 fees are paid by the fund out of mutual fund assets and are generally limited to a maximum of 1.00% per year (.75% distribution and .25% shareholder servicing) under FINRA Rules. [7]
The largest mutual funds have expense ratios that often remain the same from one year to next, even if the long-term trend has been downward. What else you should consider about expense ratios.
Generally, unlike future performance, expenses are predictable. Funds with high expense ratios tend to continue to have high expense ratios. An investor can examine a fund's "Financial Highlights" which is contained in both the periodic financial reports and the fund's prospectus, and determine a fund's expense ratio over the last five years (if the fund has five years of history).
The total expense ratio (TER) is a measure of the total cost of a fund to an investor. Total costs may include various fees (purchase, redemption, auditing) and other expenses. The TER, calculated by dividing the total annual cost by the fund's total assets averaged over that year, is denoted as a percentage. It will normally vary somewhat from ...
Schwab S&P 500 Index Fund (SWPPX) – Expense ratio: 0.02 percent SPDR S&P 500 ETF Trust (SPY) – Expense ratio: 0.095 percent State Street S&P 500 Index Fund Class N (SVSPX) – Expense ratio: 0 ...
The expense ratio of the average large cap actively managed mutual fund as of 2015 is 1.15%. [citation needed] If a mutual fund produces 10% return before expenses, taking account of the expense ratio difference would result in an after expense return of 9.9% for the large cap index fund versus 8.85% for the actively managed large cap fund.
Mutual funds are a good investment tool for beginner investors since they are affordable and accessible. Investors should choose a mutual fund based on their financial goals and desired level of risk.