This Type of Mutual Fund Offers Way More Bang for Your Buck

This Type of Mutual Fund Offers Way More Bang for Your Buck

By at least one measure, we are living in perhaps the greatest time to be an investor or saver.

Mutual fund costs have hit an all-time low, according to a new study by Morningstar, an investment research company.

Study author Patricia Oey, a senior analyst at Morningstar, writes:

“This is a positive trend, as mutual fund costs have a dollar-for-dollar impact on the returns investors ultimately realize.”

Morningstar examined mutual fund expense ratios. As we explain further in “Money Lingo You Need to Know for Financial Survival,” an expense ratio is a measure of the cost of owning shares of a mutual fund.

The average mutual fund expense ratio dropped as low as ever last year, the study found:

  • 2016: The asset-weighted average expense ratio of mutual funds was 0.57 percent.
  • 2015: 0.61 percent
  • 2014: 0.65 percent

Oey attributes this trend to “strong investor demand for lower-cost funds.”

While mutual fund costs are down overall, there is still a significant difference between the costs for actively managed mutual funds and the costs for passively managed mutual funds, also called index funds. See “Warren Buffett’s Sane and Simple Retirement Investing Plan” for more on the difference between actively managed funds and index funds.

Morningstar found that the average expense ratio of actively managed funds was 0.75 percent last year, a drop of 6 basis points from 2013. But the average expense ratio of index funds was 0.17 percent — a drop of 19 basis points from 2013.

In other words, the average actively managed fund is more than four times more costly than the average index fund.

As we reported in “Why All Investors — Even the President– Should Consider Index Funds,” the lower costs of index funds is why investors have been moving their money out of actively managed funds and into index funds in droves.

To learn more about investing in mutual funds like index funds, check out:

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