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The Impact of Fund Expense Ratio

Planning for retirement can be a tedious task when not familiar with the ins and outs of all the financial vehicles that drive the plan. One of the most popular investment strategies for retirement is mutual funds. This type of investing is simple and provides an efficient process for retirement planning. There are fees and expenses associated with these investments. The fund expense ratio is one of the important factors in deciding which fund to choose for investing. This expense along with other fees does affect the return in the end.

What is a Mutual Fund?

A mutual fund is a retirement planning opportunity that allows a group of individuals to pool their monies together. The group then hires a portfolio manager to invest the funds on their behalf. The fund manager invests these assets into a combination of stocks and bonds and other types of securities. As the assets grow, the manager buys stocks and bonds as indicated by the objectives and strategies found in the fund's prospectus. This prospectus also outlines other important information concerning the fund.

What is Fund Expense Ratio?

The fund expense ratio can also be described as the operating expense of managing the fund. This expense will include the fees the manager charges as well as 12b-1 fees. The 12b-1 fees are used to pay distribution and shareholder expenses. There are also other expenses associated with managing a fund that are not categorized with management or 12b-1 fees. Some of these "other" fees are custodial expenses, transfer agent expenses, and legal expenses.

What is an Ideal Percentage for Fund Expense Ratio?

An ideal percentage of a fund expense ratio differs with the type fund that is chosen. S&P 500 index funds can be found with an expense of less than 0.2 percent. Mutual funds that invest in the large U.S. companies would be ideal at around 1.00 percent. When it comes to foreign companies, more in depth research is required. This is also true for smaller domestic companies. Because of the extensive research involved, an ideal percentage for small domestic and foreign companies is around 1.25 percent.

Are Mutual Funds Regulated?

Mutual funds are extensively regulated. Unlike other pooled investments such as hedge funds, mutual funds are monitored by the Securities and Exchange Commission (SEC). The SEC has implemented strict rules in the Investment Company Act of 1940. Because of these rules and other federal regulations, fund managers are more confident in the structuring of funds. The strict regulation on mutual funds also promotes an easier path to portfolio diversification.

What is the Best Way to Maximize Return?

The best way to maximize return from mutual fund investing is to minimize the fees associated with the funds. The undisputed choice for minimization of fees is no-load funds. These type funds are just what the name implies. There are no sales charges with no-load funds. However, there are costs. Frugal investors lean toward these type investments and enjoy a greater return than with other types of investments.

Choosing the right investment strategy is essential when it comes to retirement planning. Doing the required research for self-investing is time consuming and well worth every minute in the end. Because time is not readily available to would be self-investors, hiring a professional to do the heavy lifting is the best course of action. There are many different mutual funds and many different fund families. Knowing the most profitable strategy for a diverse investment portfolio means happier years in retirement.

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Recent Comments & Questions

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What does the 'expense ratio' of an investment fund mean?

Expense Ratios, expressed as a percentage, represents the amount  of money a fund spends on management, administrative costs,  operating costs, 12b-1 fees and any other cost (MORE)