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What Is Mutual Fund's Expense Ratio?The expense ratio is what it costs to operate the fund -- money that is collected through management fees, administrative fees and other asset-based charges. The expense ratio is revealed as a percentage of the fund's average net assets, and it is deducted before you are paid any return. High expense ratios eat up investors' profits. Here's why: Let's say Mutual Fund A and Mutual Fund B each has a 10 percent return before expenses. If Fund A's expense ratio is 2 percent higher than Fund B's, you lose an extra 20 percent of your expected returns each year when your money is in A. Ouch! Generally speaking, you want to pay 1 percent or less in expense ratios. A high expense ratio doesn't mean better results. For instance, Vanguard Capital Opportunity Index managed a return of more than 30 percent through the first three months of 2000 while keeping an expense ratio of 0.94 percent. Why pay more?
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