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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Saturday, May 13, 2006

Mutual Funds

A mutual fund's value to you is a tricky question. You can examine its expense ratio and see how much the mutual fund will cost you per year. Also, you need to benchmark your mutual fund against something like the S&P 500 (benchmarks will differ with the type of mutual fund you own). Index fund that are basically the benchmark can be wise investments because their performance is linked to whatever the benchmark is along with the fact they have low expense ratios. Now there are many mutual funds that trade more actively and make an effort to beat their benchmark. Let's say you own a large-cap mutual fund that is actively traded and the expense ration is 1.00%. Its performance is almost the same as the index fund that has an expense ration of 0.20%. Are those 80 basis points in expenses worth the return you get from the actively traded fund? That is what you have to decide.

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