Mutual funds charge their clients an “expense ratio” for managing yourfunds. A 1.5% annual expense ratio is common in the mutual fund industry.Suppose you invest $100,000 into a fund with a 1.5% expense ratio and leave it invested for 40 years. If you have a personal MARR of 6% per year, your future worth (less the expense ratio) will be $100,000 (1 – 0.015)(F/P, 6%, 40) = 1,013,141. If you invest instead in an exchange traded fund (ETF) that has an expense ratio of 0.1% per year, you will end up with F = $100,000 (1 – 0.001)(F/P, 6%, 40) = $1,027,541 which is $14,400 more than the mutual fund. Moral: Be mindful of expenses being levied on your savings vehicles (e.g., an individual retirement account) for retirement savings. How much will you have in 40 years if the expense ratio is 3.5% per year?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Mutual funds charge their clients an “expense ratio” for managing your
funds. A 1.5% annual expense ratio is common in the mutual fund industry.
Suppose you invest $100,000 into a fund with a 1.5% expense ratio and leave it invested for 40 years. If you have a personal MARR of 6% per year, your future worth (less the expense ratio) will be $100,000 (1 – 0.015)(F/P, 6%, 40) = 1,013,141. If you invest instead in an exchange traded fund (ETF) that has an expense ratio of 0.1% per year, you will end up with F = $100,000 (1 – 0.001)(F/P, 6%, 40) = $1,027,541 which is $14,400 more than the mutual fund. Moral: Be mindful of expenses being levied on your savings vehicles (e.g., an individual retirement account) for retirement savings. How much will you have in 40 years if the expense ratio is 3.5% per year? 

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