Neither do fees. There I’ve said it and just alienated the 74% of mutual fund investors who, according to an Investment Company Institute study Understanding Investor Preferences for Mutual Fund Information, consider fees and expenses when making their fund investment decisions. Now, just like everyone else, I don’t want to pay any more then I have to for anything I buy, but when it comes to investments I’m more interested in my risk-adjusted return after expenses then I am with the amount of the fees and expenses. Let me explain. If your choice is between two US mid-cap value funds (two funds with about the same amount of risk) and one has a 1% expense ratio and returns 11% after expenses and the second has a 2% expense ratio but returns 15% after expenses, would you be willing to bear the higher expenses? I thought so. An oversimplification? Of course, not the least of which is because funds in the same risk category tend to have the same pre-expense return. But a central tenet of this Blog and academic research is that some funds (more specifically, fund mangers) tend to either outperform or underperform their risk class over time. (Proponents of index funds will dispute this and index funds are good investments but that’s the subject for another day.)  Conclusion: start with the right mutual fund type/risk level for you and consider returns first.

 

This is the first in a series of periodic postings on mutual fund fees and expenses and their impact on mutual fund investors.