Comments on: Prepare for an Increase in Mutual Fund Expense Ratios http://genxfinance.com/prepare-for-an-increase-in-mutual-fund-expense-ratios/ Helping a unique generation achieve financial independence. Thu, 24 May 2012 01:09:21 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Jeremy http://genxfinance.com/prepare-for-an-increase-in-mutual-fund-expense-ratios/comment-page-1/#comment-195366 Jeremy Wed, 26 Jan 2011 17:14:24 +0000 http://genxfinance.com/2008/12/03/prepare-for-an-increase-in-mutual-fund-expense-ratios/#comment-195366 Art, that's because NAV already has the expenses built into the price. So it's true that if you buy a fund at $10 and sell it at $11, that's a 10% gain no matter how you look at it. But what isn't easily revealed is that every day when NAV is calculated, a fraction of the ongoing expenses are reflected in that price. So you aren't taking a percentage off the top or anything, it's all calculated internally. That's why it can be a little misleading when you're comparing funds. All of the reported gains and losses you see are real rates of return after expenses. So Fund A could have had a 10% return last year and Fund B could have also had a return of 10% last year, but fund A may have only had a 0.8% annual expense and Fund B may have had a 1.1% annual expense. Your net gain is identical regardless of the fund's expenses, it's just that fund B did a little better performance wise so that it offset the slightly higher expenses. The only way to really see the effect is if you had two different funds that had EXACTLY the same holdings and different expense ratios. There, the performance should be off only by the difference in expenses. The problem is, there really aren't any funds that are identical. Even if you're talking index funds that track the same exact stocks, little things such as when the fund places trades, or how they weight their index, apply dividends, etc. can tweak performance by a couple basis points either way. But as a whole, the lower the expenses of the fund, the lower performance it has to see to match a similar fund with higher expenses to offset. Art, that’s because NAV already has the expenses built into the price. So it’s true that if you buy a fund at $10 and sell it at $11, that’s a 10% gain no matter how you look at it. But what isn’t easily revealed is that every day when NAV is calculated, a fraction of the ongoing expenses are reflected in that price. So you aren’t taking a percentage off the top or anything, it’s all calculated internally.

That’s why it can be a little misleading when you’re comparing funds. All of the reported gains and losses you see are real rates of return after expenses. So Fund A could have had a 10% return last year and Fund B could have also had a return of 10% last year, but fund A may have only had a 0.8% annual expense and Fund B may have had a 1.1% annual expense. Your net gain is identical regardless of the fund’s expenses, it’s just that fund B did a little better performance wise so that it offset the slightly higher expenses.

The only way to really see the effect is if you had two different funds that had EXACTLY the same holdings and different expense ratios. There, the performance should be off only by the difference in expenses. The problem is, there really aren’t any funds that are identical. Even if you’re talking index funds that track the same exact stocks, little things such as when the fund places trades, or how they weight their index, apply dividends, etc. can tweak performance by a couple basis points either way. But as a whole, the lower the expenses of the fund, the lower performance it has to see to match a similar fund with higher expenses to offset.

]]> By: Art Fitzgerald http://genxfinance.com/prepare-for-an-increase-in-mutual-fund-expense-ratios/comment-page-1/#comment-195355 Art Fitzgerald Wed, 26 Jan 2011 16:59:36 +0000 http://genxfinance.com/2008/12/03/prepare-for-an-increase-in-mutual-fund-expense-ratios/#comment-195355 I'd like to understand how mutual fund expense ratios affect fund performance. If, for example, a no load fund is bought at NAV and sold at NAV and NAV equals the asset value of the underlying stocks less fund expenses, I don't understand how the expense ratio has any effect on the fund's percentage gain or loss. If I buy a fund for $99 ($100 underlying stock value less 1% expense ratio) and sell it for $148.50 ($150 underlying stock value less 1% expense ration), I realize a 50% gain which is the same gain as the underlying stocks. Either the no load fund is not both bought and sold at NAV or something else is going on that I don't understand. I’d like to understand how mutual fund expense ratios affect fund performance. If, for example, a no load fund is bought at NAV and sold at NAV and NAV equals the asset value of the underlying stocks less fund expenses, I don’t understand how the expense ratio has any effect on the fund’s percentage gain or loss. If I buy a fund for $99 ($100 underlying stock value less 1% expense ratio) and sell it for $148.50 ($150 underlying stock value less 1% expense ration), I realize a 50% gain which is the same gain as the underlying stocks. Either the no load fund is not both bought and sold at NAV or something else is going on that I don’t understand.

]]> By: Patrick http://genxfinance.com/prepare-for-an-increase-in-mutual-fund-expense-ratios/comment-page-1/#comment-96466 Patrick Mon, 08 Dec 2008 00:30:56 +0000 http://genxfinance.com/2008/12/03/prepare-for-an-increase-in-mutual-fund-expense-ratios/#comment-96466 I hadn't thought about this, but it certainly makes sense. I try to keep my investments in index funds whenever possible. But as you mentioned, there are many 401k plans that don't have that option. I hadn’t thought about this, but it certainly makes sense. I try to keep my investments in index funds whenever possible. But as you mentioned, there are many 401k plans that don’t have that option.

]]> By: RC@Thinkyourwaytowealth http://genxfinance.com/prepare-for-an-increase-in-mutual-fund-expense-ratios/comment-page-1/#comment-96089 RC@Thinkyourwaytowealth Thu, 04 Dec 2008 03:33:43 +0000 http://genxfinance.com/2008/12/03/prepare-for-an-increase-in-mutual-fund-expense-ratios/#comment-96089 Thanks for alerting us to this- I would never have thought about it, but it definitely makes sense. Will have to keep an eye on my mutual funds to see if any increase would precipitate a change in funds.- On the other hand, the company's fixed expenses might go down if they have less employees due to layoffs ;) Thanks for alerting us to this- I would never have thought about it, but it definitely makes sense. Will have to keep an eye on my mutual funds to see if any increase would precipitate a change in funds.- On the other hand, the company’s fixed expenses might go down if they have less employees due to layoffs ;)

]]> By: Trevor http://genxfinance.com/prepare-for-an-increase-in-mutual-fund-expense-ratios/comment-page-1/#comment-96035 Trevor Wed, 03 Dec 2008 15:29:50 +0000 http://genxfinance.com/2008/12/03/prepare-for-an-increase-in-mutual-fund-expense-ratios/#comment-96035 Awesome post. I was just deciding to buy some mutual funds a few days ago and I stumbled on this article. This definitely keeps me on my feet. Awesome post.

I was just deciding to buy some mutual funds a few days ago and I stumbled on this article. This definitely keeps me on my feet.

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