27 June 2022 20:23

Should I care about the expense ratio of the money market fund that holds excess cash in my brokerage account?

At what point do you think an expense ratio is too high?

A number of factors determine whether an expense ratio is considered high or low. A good expense ratio, from the investor’s viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.

Where should you hold your cash when it’s not invested?

Investors have a variety of places to hold cash they don’t want to invest, including savings accounts, money market funds, deferred fixed annuities, certificates of deposit (CDs), and short-term bonds.

What is the downside of a money market account?

Some disadvantages are low returns, a loss of purchasing power, and that some money market investments are not FDIC insured. Like any investment, the above pros and cons make a money market fund ideal in some situations and potentially harmful in others.

Why is expense ratio important?

An expense ratio is important because it lets an investor know how much they are paying in costs by investing in a specific fund and how much their returns will be reduced by. The lower the expense ratio the better because it means that an investor is receiving higher returns on their invested capital.

Does expense ratio really matter?

A mutual fund’s expense ratio is very important to investors because fund operating and management fees can have a large impact on net profitability. The expense ratio for a fund is calculated by dividing the total amount of fund fees—both management fees and operating expenses—by the total value of the fund’s assets.

Is a higher expense ratio better?

A good rule of thumb is anything under . 2% is considered a low fee and anything over 1% is high, according to many experts. The higher the expense ratio, the more it’ll eat into your returns.

Which is better FDIC or SIPC?

Remember that the SIPC, for example, will cover up to $500,000 in investments, but will only protect $250,000 in cash. The FDIC, meanwhile, will protect up to $250,000 per deposit account per customer, which means you can potentially protect $1 million or more across several types of accounts at one bank.

Should I keep cash in my brokerage account?

Investors should not allocate more than 5 percent of their cash into a brokerage account, says Edison Byzyka, chief investment officer of Credent Wealth Management in Auburn, Indiana. It’s possible to keep too large of an amount in a portfolio, sitting there in the sidelines.

What can I do with excess cash?

What to do with extra cash

  • Pay off debt. If you have a significant amount of debt, consider putting your extra money toward paying that down or off. …
  • Boost your emergency fund. …
  • Increase your investment contributions. …
  • Invest in yourself. …
  • Consider the timing. …
  • Go ahead and treat yourself.

How does expense ratio affect return?

The expense ratio, which is calculated annually and disclosed in the fund’s prospectus and shareholder reports, directly reduces the fund’s returns to its shareholders, and, therefore, the value of your investment.

Which of the following would you expect to have the lowest expense ratio?

Which of the following would you expect to have the lowest expense ratio? E: Bond mutual funds typically have lower expense ratios than stock funds, which tend to be riskier and require more sophisticated investment strategies.

How expense ratio is deducted in mutual funds?

It is deducted on a daily basis after calculating its per day expense. The annual expense ratio is divided by the number of trading days of the year and is charged on the closing gross NAV.

Are expense ratios bad?

In general, a good expense ratio is at or around 0.50%. If you want to get more specific, a good expense ratio is one that is at or below the average ratio for a certain fund. Typically, you want the expense ratio to be as low as possible, so it takes less of a bite out of your investments.

Why are high expense ratios bad?

An expense ratio is an annual fee charged to investors who own mutual funds and exchange-traded funds (ETFs). High expense ratios can drastically reduce your potential returns over the long term, making it imperative for long-term investors to select mutual funds and ETFs with reasonable expense ratios.

What is the impact of expense ratio?

Expense ratio indicates the percentage of sales to the total individual expense or a group of costs. A lower rate means more profitability and a higher rate means lower profits. It becomes critical for schemes with comparatively more moderate yields.

How does the expense ratio work?

Think of the expense ratio as the management fee paid to the fund company for the benefit of owning the fund. The expense ratio is measured as a percent of your investment in the fund. For example, a fund may charge 0.30 percent. That means you’ll pay $30 per year for every $10,000 you have invested in that fund.

Is expense ratio included in total return?

Total returns do account for the expense ratio, which includes management, administrative, 12b-1 fees, and other costs that are taken out of assets.

Why would an investor choose the higher cost fund?

If an investment with a higher expense ratio is a better fit for your long-term goals, it may make sense to pay the higher fee. If you’re considering two similar funds that generally have the same goals and returns, it often makes sense to pick the investment with the lower expense ratio.

What is a good expense ratio for index funds?

The best expense ratio is 0%. Surprisingly, some passive fund managers are starting to offer index funds with expense ratios of 0%. A good expense ratio for a mutual fund is less than 1%.

Do you subtract expense ratio from yield?

Expense Ratio Effects
If the fund’s expense ratio is 1.5 percent, the net yield paid to investors will be 4.5 percent. If the fund’s expense ratio is 0.5 percent, the fund will yield 5.5 percent. The result is a full 1 percent difference just from the lower expense ratio.

What is a reasonable fee for a managed fund?

Online advisors have shown that a reasonable fee for money management only is about 0.25% to 0.30% of assets, so if you don’t want advice on anything else, that’s a reasonable fee, says O’Donnell.

Is it worth paying a financial advisor 1%?

A financial advisor can give valuable insight into what you should be doing with your money to reach your financial goals. But they don’t offer their advice for free. The typical advisor charges clients 1% of the assets that they manage. However, rates typically decrease the more money you invest with them.

Are managed accounts worth it?

Managed money offers a degree of tax efficiency, flexibility, convenience and peace of mind that few other investment options can provide. These features have made fee-based investing and managed-money investment vehicles quite popular among affluent, tax-sensitive investors.