All mutual funds carry expense ratios, but few investors know how to spot them or how they factor into investment returns. Here’s how to identify your mutual fund’s expense ratio and find more competitively priced options.
What is a mutual fund expense ratio?
A mutual fund expense ratio is a fee that helps cover the cost of maintaining the fund. The fee is expressed as a percentage of your fund investment and typically ranges from 0.5% to 1% — although some expense ratios may scale as high as 2.5%. The exact cost will depend on the type of fund. As a rule of thumb, actively managed small-cap funds tend to have higher expense ratios than large-cap funds.
Why expense ratios matter
An expense ratio is a fee — and fees have the potential to detract from your investment returns. Let’s say you’ve invested $1,000 into a mutual fund with an expense ratio of 0.75%. That means you’ll pay $7.50 each year to maintain your investment in the fund. The more you have invested, the more these fees can stack up. And most investors don’t know the expense ratio of the fund they’ve invested in — if they’re aware they’re paying anything at all. That’s because most mutual fund expense ratios are automatically swept from your fund investment. Can you avoid paying mutual fund expense ratios? Unfortunately, no. But there are ways to cut back on costs to pare down the impact of expense ratios on your bottom line. The first step? Identifying your fund’s expense ratio.
How to find a mutual fund’s expense ratio
To find out how much you’re paying to invest in a mutual fund, you’ll need to find the fund’s expense ratio. There are typically three places to find this information:
Company’s website. Visit the managing company’s website and search for the mutual fund by name. Most funds have dedicated web pages that detail the fund’s summary, including its expense ratio.
By ticker symbol. Try plugging the fund’s ticker symbol into a search engine. A market summary of the fund is typically displayed among the top results that often includes the fund’s expense ratio.
In the fund’s prospectus. A fund prospectus is sent to investors annually by letter or email. You can also download the fund’s prospectus from the managing company’s website. The expense ratio can typically be found under the fees section of the prospectus.
Mutual fund vs. ETF expense ratios
Both mutual funds and exchange-traded funds (ETFs) have expense ratios, but ETF fees tend to be lower. Why? Because ETFs are passively managed and mutual funds rely on the active guidance of a fund manager. For comparison: Mutual fund expense ratios tend to fall between 0.5% to 1% while the average Vanguard ETF expense ratio is 0.06%. Is the expertise of an active fund manager worth the added cost? It depends. When it comes to ETFs vs. mutual funds, each asset has its advantages and drawbacks. But the higher cost of an actively managed fund may only be beneficial if the fund manager has a track record of solid returns — otherwise, your capital may be better spent elsewhere.
How to buy mutual funds
Add a mutual fund to your portfolio by following these steps:
Choose a broker. Compare your online platform options by research offerings, trading fees and security lineup. Not all brokerages offer access to mutual funds and the ones that do, like Fidelity and TD Ameritrade, tend to charge trading fees in the neighbourhood of $49 per no-load mutual fund.
Open an account. Start the signup process from your selected broker’s website or mobile app. Expect to provide personal and financial details like your Social Security number and bank account information.
Research funds. Narrow down your fund options by exploring the fund holdings, fees and return history.
Place your order. Pinpoint the fund you’d like to invest in by searching for the fund’s name or ticker symbol from your online account. Some funds have minimum investment thresholds, so be prepared to meet that minimum before you invest.
Monitor your investment. Track the performance of your mutual fund by logging in to your account.
Compare brokers that offer mutual funds
Consider trading fees and available research tools to help narrow down your brokerage options.
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What to look for when buying mutual funds
Before you invest in a mutual fund, consider the following:
Fund holdings. Take a look at what the fund invests in and compare its holdings with your risk tolerance and existing investments.
Expense ratio. Find the fund’s expense ratio and weigh this against the potential gains of investing in the fund.
Additional fees. Assess additional mutual fund fees that could apply to the purchase or sale of the fund, like sales loads and redemption fees.
Fund performance. Review the fund’s annual returns. Has the fund performed well year-over-year, or is its performance volatile and inconsistent?
Investment minimum. Ensure you can meet the fund’s investment minimum. Not all funds impose an investment minimum, but those that do tend to require at least $500 to buy into the fund.
Our pick for finding an advisor: Datalign advisory
Expense ratios are an unavoidable part of investing in mutual funds. But not all expense ratios weigh the same, and it’s possible to cut costs by investing in funds with more competitive fees. To invest in mutual funds, you’ll need a brokerage account. Review your trading platform options by features and fees to find the account best suited to your investment goals.
Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga. See full bio
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