Expense ratios are something that you want to watch out for when you are doing any kind of stock mutual fund investing.  You may have found some great funds, but if you have to pay high management fees, it may eat into your returns.  So make sure you know what these fees are before you get started with a fund.

The expense ratio is basically the percentage of the total asset it takes to pay for overhead and administrative costs.  Most of the time, these are significant portions of the fund in actively managed funds.  For passively managed funds, which is what Finance World recommends for beginner stock investors, the expense ratios tend to be fairly low.

The reason it may be high for actively managed funds is because these have a lot more overhead.  They have to pay high salaries to money managers.  Many times, these managers have analysts, assistants and secretaries that they have to pay.  That’s not to mention the office space, computers, travel costs, etc.  Manually trying to find good stocks to invest in is a very costly activity.

Index funds on the other hand, which as passively managed, are very cheap to operate, making their expense ratios very low.  It’s usually a computer program making the investment decisions based on an index that the fund is trying to track.

You can get the expense ratio figures on any investment prospectus of the mutual funds you are interested in looking at.  Again, make sure you figure these in when you are calculating potential future returns.  Nothing eats up earnings more than transaction costs and management fees.  Make sure that there is nothing hidden in there either by way of fees.

Investing is risky and you should consult a financial adviser before risking any capital.  You can lose some or all of your initial investment in the stock market or in any other financial markets.