How Much Will a New Fund Cost?

When stocks are up 20% per year, costs might not seem important. After all, a 2% expense ratio off a 20% return leaves you with an 18% gain—and who would complain about that? But if your stock fund were to return, say, 8%, that 2% expense ratio leaves you with just a 6% gain. One fourth of your return has just gone to cover expenses. Now that's a big deal. And regardless of the level of returns, paying more than you have to can cost you tens of thousands of dollars or more in compounded returns over time. So when evaluating rookie funds, be sure to consider their expense ratios. For some context on whether a fund's costs or on the high side or relative low, look for the "fee level" on the quote page for that fund. You'll see a fund's expenses described as high, above average, average, below average, or low.

Why some new funds have high fees

You'll notice that new funds are more likely to carry "high" or "above average" expense ratios than older funds. That's often because small, new funds don't enjoy the same economies of scale that older, larger funds do. Larger funds have more shareholders to cover expenses. So when buying a rookie fund, you'll want to be sure that the fund's family has a history of bringing down costs as assets rise. You can determine a fund family's practice by examining the expense ratios of the family's more established funds—is the fee level "average" or below?