{"id":5168,"date":"2015-01-05T05:56:19","date_gmt":"2015-01-05T13:56:19","guid":{"rendered":"http:\/\/blog.paladinregistry.com\/?p=5168"},"modified":"2016-01-15T14:46:30","modified_gmt":"2016-01-15T22:46:30","slug":"want-higher-return-pick-cheaper-mutual-fund","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/want-higher-return-pick-cheaper-mutual-fund\/","title":{"rendered":"Want a Higher Return Pick a Cheaper Mutual Fund"},"content":{"rendered":"

When choosing mutual funds<\/a> for our portfolio too often we get caught up in the returns of the fund while not asking ourselves the most important question.\u00a0 How much does this fund cost?\u00a0 A common thought is the fund which returned the most last year or over the last handful of years must be the best fund and thus the right fund for me, but that is not always the case.<\/p>\n

Often overlooked, but extremely important, is the price of the fund.\u00a0 The price of the fund is determined by its expense ratio; an expense ratio of .40% means the fund will charge you 40 cents for every $100 you invested in the fund.\u00a0 This fee is to cover operating expenses of the fund, like transaction and recordkeeping fees, and to compensate the fund\u2019s manager(s).<\/p>\n

One reason the expense ratio is overlooked is because it doesn\u2019t come directly out of our account; rather, the expense ratio is rolled into the fund\u2019s price, known by the acronym NAV or Net Asset Value.\u00a0 I bet if we saw the fees we were paying directly debited from our account we\u2019d look more closely at them.<\/p>\n

Know that the fee you pay for a mutual fund directly impacts your return.\u00a0 If two comparable funds each returned 7%, and Fund A charged you a 1.00% expense ratio while Fund B charged you a .50% expense ratio then Fund A returned 6% while Fund B returned 6.5%. \u00a0Clearly, Fund B had the superior return – it made you more money because it simply took less.<\/p>\n

Here\u2019s another way to look at it; consider the fee you pay for a fund a big hole in the ground. \u00a0In order for you to get out of that hole and get back to ground level your fund must generate a return equal to the fee it takes.\u00a0 So Fund A is a 10 foot deep hole, while Fund B is a 5 foot deep hole, it\u2019ll be easier for your fund to get back to ground level when it starts 5 feet deep instead of 10.<\/p>\n

Have you ever gone to the gas station across the street because its gas was 10 cents cheaper?\u00a0 The company is different, but you know the gas is the same, so why pay more?\u00a0 It\u2019s the same with mutual funds.\u00a0 If this company\u2019s S&P 500 fund costs .40% and that company\u2019s S&P 500 fund costs .20% would you stay at the station that charges you $4.00 for a gallon of gas or would you go across the street and pay $2.00 for the same gallon of gas?<\/p>\n

So how do you find low-cost mutual funds?\u00a0 First off, avoid actively managed mutual funds<\/a>.\u00a0 Actively managed funds try to beat the market (they will tell you so in the fund\u2019s description or summary), some will, but most won\u2019t, and the ones that do beat the market won\u2019t do it for any extended period of time. \u00a0In the end, with the significantly higher fees they charge there is almost no advantage to using actively managed funds.\u00a0 Look for mutual funds that have the word \u2018index\u2019 in their title.\u00a0 Index funds merely track an index<\/a>, they don\u2019t try to beat the market – they join it.\u00a0 You will find these funds offered through low-cost mutual fund providers such as Vanguard<\/a>, Charles Schwab<\/a>, Fidelity<\/a>, and Dimensional Fund Advisors<\/a> (DFA funds aren\u2019t quite index funds, but that\u2019s a topic for a different article).<\/p>\n

And don\u2019t just go off of name alone.\u00a0 Research a fund\u2019s expense ratio yourself.\u00a0 You will generally find the expense ratio on the fees and minimums page for a mutual fund, and you will definitely find it in a fund\u2019s prospectus.\u00a0 As a general guideline expense ratio should be under .20% for bond funds; under .30% for US large cap stock funds; under .50% for US small cap stock funds; and under .60% for international and emerging markets stock fund.\u00a0 If you are paying more than these guidelines for your fund, you\u2019re probably paying too much and should seriously reconsider the fund you are in.\u00a0 You should never pay more than 1% for any<\/em> fund.<\/p>\n

Most of us get caught up trying to pick the right fund to maximize our return; the truth is a great majority of the time the right fund is the cheaper fund.\u00a0 Over the long-term consistently being in less expensive mutual funds will yield higher returns than comparable, but more expensive mutual funds.<\/p>\n

To learn more about Michael Pensinger, view his Paladin Registry profile<\/a><\/strong><\/em>.<\/p>\n","protected":false},"excerpt":{"rendered":"

When choosing mutual funds for our portfolio too often we get caught up in the returns of the fund while not asking ourselves the most important question.\u00a0 How much does this fund cost?\u00a0 A common thought is the fund which returned the most last year or over the last handful of years must be the best fund and thus the right fund for me, but that is not always the<\/p>\n","protected":false},"author":55,"featured_media":5173,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-5168","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"\nCheaper Mutual Fund - Higher Return<\/title>\n<meta name=\"description\" content=\"When choosing a mutual fund we get caught up in the returns of the fund while not asking the most important question. 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