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Index funds are a popular way to invest in the stock market.
They’re a type of mutual fund that’s passively managed and track the performance of an index, such as the S&P 500.
If you’re reading this, then chances are you already know a thing or two about index funds.
That’s awesome!
Although index funds are cheap, you still need to understand all fees associated with anything you invest in.
By the end of this post, you’ll know all fees associated with index funds so you can make better financial decisions for yourself.
What are index funds?
Before we jump into index fund fees, let’s cover the basics.
An index fund is a type of mutual fund. While most mutual funds are actively managed, index funds are passively managed simply to match the performance of their benchmark.
An example would be an S&P 500 Index Fund. Because you can’t invest directly into the S&P 500, an index fund provides you with the opportunity to invest in the 500 companies without having to buy all 500 individual stocks.
Think of it like a basket full of different stocks. Buy the basket, and you invest in all the stocks within the fund.
Read More >> my free all-in-one guide to index fund investing
Why do people invest in index funds?
Index funds make great investments because they provide a simple and low-cost way to invest in a large number of stocks, without taking on too much risk.
Let’s say you wanted to invest in the top international companies around the world. You’d have to spend hours and hours of research, searching for the best companies to invest in.
Then, you would have to determine how much of your money you want to allocate to each stock.
Instead of doing all that, you can make your life easier by finding an international index fund that invests in companies around the world.
A perfect example would be Fidelity’s FSPSX. This is Fidelity’s International Index Fund and it invests in international companies from countries like the U.K., Japan, France, and Switzerland.
Index funds have a lot of pros and also some cons as well. Learn more about index fund pros and cons!
More >> Learn more about Fidelity’s FSPSX
Do index funds charge fees?
The short answer is: yes. Index funds do charge fees, but they’re extremely cheap and affordable for anyone.
These fees are known as “expense ratios.”
An expense ratio is a fee that an investment company charges for managing a mutual fund, index fund, or exchange-traded fund (ETF). It covers costs such as administrative expenses, management fees, and operating costs.
The expense ratio is expressed as a percentage (%) and is deducted from the amount of money you have invested into the fund per year.
For example, let’s say you have $10,000 invested into a fund with an expense ratio of 0.04%. That means you would pay $4.00 for that year.
Expense ratios are always indicated on the front summary page of any fund.
Do index funds have high fees?
No!
Index funds are probably one of the cheapest and safest investments you can find. When it comes to investing, it’s important to minimize fees, and index funds do just that.
The average expense ratio of an index fund ranges anywhere from 0.015% to 0.04%.
In other words, if you were to invest $10,000, you would only be paying $1.50 to $4.00 per year!
Index funds are a type of mutual fund that simply track a market index. They’re often well-known as “passively-managed,” because they don’t try to beat the market, but rather simply replicate its performance.
Being passively managed means the fund manager isn’t required to do extensive research or make any trading decisions, to see which stocks to invest in. He or she would simply just need to make sure the index fund is tracking its benchmark index.
This leads to index funds being such an affordable investment that anyone can invest in them.
If you’re looking for a cost-effective way to invest in the market, index funds are worth considering.
How do fees impact investors?
Fees can have a significant impact on investors depending on the cost.
You should be aware of the fees you’re being charged because they can eat into investment returns over time.
Let’s go over a couple of examples so you understand the importance of minimizing fees.
Let’s say you invest a total of $20,000 split in half into two different funds.
- You put $10,000 into Fund A with an expense ratio of 2%
- You put $10,000 into Fund B with an expense ratio of 0.04%
Now we assume both funds yield an average of 10% per year and you hold the fund for 30 years.
Fund A would yield $95,184 and you would’ve paid a whopping $24,026 in fees.
Fund B would yield $172,412 and you would’ve only paid $718 in fees.
Can you see how significantly fees can affect your return on investment?
Always be aware of how much you’re paying when selecting what to invest in.
Conclusion
Investors should prioritize finding investments with lower fees.
While some fees are necessary to cover the costs of managing the fund, most mutual funds charge outrageously high fees that’ll eat into your returns.
The best way you can avoid high unnecessary fees is by staying away from actively managed mutual funds and investing in passively managed index funds.
This will help you maximize returns, and over time, allow the process of compound interest to build your investments into wealth.
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