If you’re thinking about investing in mutual funds or index funds, you should know that it’s quite normal for you to be charged a fee. How much that fee costs will vary depending on the mutual fund provider.
A listener to Clark Howard’s Podcast recently asked whether the fee matters on high-return investments.
Mutual Funds and Index Funds: Do the Fees Matter on High-Return Investments?
Clark says the fee you pay for a particular investment fund is not necessarily an indicator of how well it will perform in the long run.
“Yes, you could have a really high-cost fee … that outperforms the typical fund over a period of time,” he says. “But if you look over typically five- or 10-year periods or longer, what you’ll see is that the lowest cost funds rise to the top.”
Clark says that’s why investors like index funds and ETFs (exchange-traded funds), which tend to have lower expense ratios. With the ability to crunch data so much more easily these days, investors have noticed that these low-cost funds tend to do well.
Should You Invest in a High-Cost or Low-Cost Fund?
Clark is a fan of low-cost funds. Here’s an analogy that he uses:
“If you go to the doctor, and one person is carrying proper body weight and is exercising all the time and another person is carrying a lot more weight and is not exercising regularly, there’s a difference in how their long-term health is going to be. It’s the same with funds. It’s like the funds are carrying around extra weight, and the burden of carrying that extra weight all the time hurts their performance.”
The Clark-Recommended Index Fund
When it comes to index funds, Clark recommends target date funds for almost everyone. The fees associated with these funds can range from less than 0.1% to around 1%.
To find out the fee associated with a particular fund you’re interested in, check out this Fund Analyzer tool from the Financial Industry Regulatory Authority (FINRA).
Clark says that index funds and ETFs typically have the lowest expenses of all investment products.
“When you look over longer periods of time, they are at the top of the heap. And over time, a fund that maybe did really well and excelled beyond others over a shorter period of time has a really hard time outperforming them over a longer period of time.”
Want to know more about ETFs? Read our in-depth guide on ETFs.
Want to deepen your knowledge of index funds? Read our in-depth guide on index funds.