
What is an expense ratio? It is a fee that mutual fund companies subtract from your investments each year for their services. Can that small fee have such a big impact? Yes, it’s possible for high expense ratio to eat up 50% of your gain — given enough time, high expense ratio mutual funds can cripple your investment growth potential.
There are many types of mutual funds, and many of them are excellent. And there are situations where mutual funds are more desirable than other types of investment. For example, they are great for diversification, easier for beginners, and easier to contribute regularly (i.e., some of them do not charge trade commission each time you add more money) — to name a few. That said, it is absolutely necessary to avoid mutual fund with high expense ratio. Here’s why:
Let’s take a look at $10,000 invested over 30 years with an average annualized gain of 10% (see chart below)

View spreadsheet
Now let’s assume these funds have the same return before expenses. If you invested in a fund with an expense ratio of 0.5% (typical for index funds), after 30 years you would have $152,203 and paid a total of $22,291 (or 12.8%) in expenses. Let’s look at another example. If you invested in an exotic mutual fund with an expense ratio of 2.5%, you would have only $87,550 and paid a whooping $86,944 (almost 50%) in expense fee. Ouch!
So high expense ration can really hurt your investment performance; therefore, you should consider the expense ratio carefully when investing in mutual funds. Alternatively, individual stocks and ETFs may make sense if you can invest enough money to overcome the trade commissions.
Here are a few basic rules I follow for investing with mutual funds.
If you wish to learn more about mutual funds, here is a good article that will teach you the basics of investing in mutual funds.

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Where is the chart?
1% of $10,000 = $100. How can -$100/year = -thousands of dollars?
Does the mutual fund charge 1%/month? Or am I missing something?
Sincerely,
Cory
*I already receive regular email from Moolanomy thanks.
@Cory – thank you for your question. The problem is that mutual funds don’t charge the expense on just your contribution — they charge 1% on the entire amount (contribution plus growth).
For example, if you have $55,000 after you invested the initial $10,000 for 20 years, you will be charged $550 (not $100).
I hope that clears it up.
Why do the values in the far right column grow by 7.25% if the remainder after taking out the 2.5% is 7.5%?
@B – I am not sure what you mean, so I shared the spreadsheet above here: http://spreadsheets.google.com.....hOZXfZxiYg
Please take a look and let me know if you see what’s wrong.