Cost of Investing in Funds
A fund's expense ratio and turnover rate are two important statistics that can help you compare the costs of one mutual fund to another.
The higher a fund's expense ratio, or the percentage of your account's value that you pay in fees, the lower your long-term return. Every dollar paid in fees reduces the present value of your account as well as the amount you are able to reinvest.
A fund's turnover rate measures the frequency with which it buys and sells investments. Funds with higher turnover rates tend to have higher transaction costs, which are paid out of the fund's income, lowering your return. High turnover also has the tendency to produce more short-term capital gains, which result in taxable investment income that reduces your earnings even further.
In contrast, an index fund typically has a low turnover rate as its securities change only as frequently as the index it follows, which can be once a year or less. However, you may also discover managed funds that describe themselves as tax-efficient because their managers deliberately keep transactions to a minimum.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.