Is there a formula to determine if fees for a managed fund vs a index fund are worth it with a higher return?
September 6th, 2010
I am trying to decide on different funds within my 401k plan. The managed fund has higher fees than the index, but the returns are quite a bit higher as well. I want to find out if there is a break even point, a calculation that shows whether the higher fees are worth the return
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I agreed with zeuz’s above calculations. Keep in mind that your fund’s "expense ratio" is an annualized percent, so you would subtract it from the fund’s annual return.
If you’re investing for the long term, I would definitely go with the index fund, since the vast majority of managed fund perform worse than general indexes over the long run. Sure, some funds have a strong year or two or five, but over 20 or 30 years, the fees add up and make them less profitable than an index fund. Your financial adviser may not tell you this, because they are likely making money or a commission off of the higher expense ratio.
Vanguard’s website has a cool interactive cost comparison chart, regarding the expenses of funds, and a ton of good info:
https://personal.vanguard.com/us/whatweoffer/mutualfundinvesting/costs?Link=learnmore&LinkLocation=mutualfundinvesting_overview
Yes. It’s a very simple formula. It’s called addition.
Index Fund with 0.1% fees and 10.0% return is actually a return of 9.9%
Managed Fund with 1.5% fees and 15.0% return is actually a return of 13.5%