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I am attempting to invest money in mutual funds for the first time ever but honestly I have no idea how to figure out what is good and what's bad. I've seen sites recommending to look at the fees and the cost of the fund, but I am not sure where to look for that information.

For example, the VHCIX fund. I have the following questions:

  1. It says expense ratio of 0.14%. What does it mean? That they will take 0.14% of my money or 0.14% of the profit? Basically, I would like to find out that if I invest $1000 and the fund makes 20% in a year...how much money will I actually see?
  2. How much taxes will I be subject to (I understand this depends on whether there are dividends on individual stocks, but where do I see this information).
  3. What is considered to be a reasonable expense ratio? VHCIX is at 0.14% while VTTHX is at 1.24% (but significantly cheaper to get into). And this (FFFEX) Fidelity fund claims 0% expense ratio, which I don't get.
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FFFEX has 0.79% expense ratio. etrade.wallst.com/v1/stocks/snapshot/snapshot.asp?symbol=FFFEX –  littleadv Feb 11 at 5:24

2 Answers 2

  1. The 0.14% is coming out of the assets of the fund itself. The expense ratio can be broken down so that on any given day, a portion of the fund's assets are set aside to cover the administrative cost of running the fund. A fund's total return already includes the expense ratio.

  2. This depends a lot on what kind of account in which you hold the fund. If you hold the fund in an IRA then you wouldn't have taxes from the fund itself as the account is sheltered. There may be notes in the prospectus and latest annual and semi-annual report of what past distributions have been as remember the fund isn't paying taxes but rather passing that along in the form of distributions to shareholders. Also, there is something to be said for what kinds of investments the fund holds as if the fund is to hold small-cap stocks then it may have to sell the stock if it gets too big and thus would pass on the capital gains to shareholders. Other funds may not have this issue as they invest in large-cap stocks that don't have this problem. Some funds may invest in municipal bonds which would have tax-exempt interest that may be another strategy for lowering taxes in bond funds.

  3. Depending on the fund quite a broad range actually. In the case of the Fidelity fund you link, it is a "Fund of funds" and thus has a 0% expense ratio as Fidelity has underlying funds that that fund holds. What level of active management are you expecting, what economies of scale does the fund have to bring down the expense ratio and what expense ratio is typical for that category of fund would come to mind as a few things to consider. That Fidelity link is incorrect as both Morningstar and Fidelity's site list an expense ratio for the fund of funds at .79%. I'd expect an institutional US large-cap index fund to have the lowest expense ratio outside of the fund of fund situation while if I were to pick an actively managed fund that requires a lot of research then the expense ratio may well be much higher though this is where you have to consider what strategy do you want the fund to be employing and how much of a cost are you prepared to accept for that? VTTHX is Vanguard Target Retirement 2035 Fund which has a .14% expense ratio which is using index funds in the fund of funds system.

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I believe the 0% expense ratio for FFFEX on the MSN site is a mistake. It is reported as 0.79% everywhere else I've checked. Fidelity themselves report load at 0%, but don't report expense ratio. –  littleadv Feb 11 at 5:29

It says expense ratio of 0.14%. What does it mean?

Essentially it means that they will take 0.14% of your money, regardless of the performance. This measures how much money the fund spends out of its assets on the regular management expenses.

How much taxes will I be subject to

This depends on your personal situation, not much to do with the fund (though investment/rebalancing policies may affect the taxable distributions). If you hold it in your IRA - there will be no taxes at all. However, some funds do have measures of non-taxable distributions vs dividends vs. capital gains. Not all the funds do that, and these are very rough estimates anyway.

What is considered to be a reasonable expense ratio?

That depends greatly on the investment policy. For passive index funds, 0.05-0.5% is a reasonable range, while for actively managed funds it can go up as much as 2% and higher. You need to compare to other funds with similar investment policies to see where your fund stands.

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So as an example, if I invest $1000 and the fund makes 0% for this year, I will end up with $986. If they double my money (e.g. to $2000), I will end up with $1972. Is this what you are saying? And is this 0.14% the total amount of fees they will take or are there some other fees? –  AngryHacker Feb 11 at 5:42
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@AngryHacker it is essentially factored into the buy/sell price, there's no one charge a year but rather continuous pricing based on the fund activities. Generally, fund price represents the value of the underlying assets, so when assets are sold to cover expenses - the price would drop accordingly. –  littleadv Feb 11 at 5:49
    
@AngryHacker for 0.14% that'd actually be $998.6 and $1997.2 (not $986/$1972) –  André Morujão Feb 11 at 16:02

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