Say you send two teams of runners out to run a marathon, but need 1 group to carry 25-pound backpacks. Which group do you believe is most likely to possess the much better typical time?
A fund's costs are like these backpacks: They are able to drag down your total return. By contrast, a mutual fund with low costs may have an simpler time delivering you strong returns. So you would like to make certain you select a fund with an "expense ratio" – the annual price of owning the fund, divided by your investment – that is affordable.
What is affordable? It depends upon the type of fund. Index funds ought to possess the lowest charges, since they price fairly small to run. You are able to effortlessly discover an S&P 500 index fund with an expense ratio of less than 0.2%, for example. For mutual funds that invest in large U.S. companies, look for an expense ratio of no more than 1%. And for funds that invest in small or international companies, which typically need more research, look for an expense ratio of no more than 1.25%