Investment fees and expense ratios: why a small percentage matters

ReviewedEducational article · Updated Oct 2026

Key takeaways

An expense ratio is the yearly fee a fund charges, expressed as a percentage of assets.
Fees are taken from returns every year, so they compound against you.
Over 30 years, a 1% fee can cost far more than a 0.1% fee on the same contributions.
Fees are one of the few parts of investing you can control.

When you invest through a fund, you usually pay for the service through an annual charge. The most common measure is the expense ratio: the percentage of your invested assets taken each year to cover the fund’s costs. A fund with a 0.5% expense ratio costs about $5 a year for every $1,000 invested.

Why a small fee has a large effect

Fees reduce your return every single year, and the money lost to fees can no longer grow. This is compounding in reverse: the fee does not just cost you the amount paid, but also all the growth that amount would have produced.

A worked example

Assume you start with $10,000 and add $300 a month for 30 years. The investment earns 7% a year before fees, compounded monthly (hypothetical, not a forecast). Compare two funds:

$10,000 start, $300 per month, 30 years, 7% before fees
Annual fee	Net return	Ending balance
0.1%	6.9%	$437,631
1.0%	6.0%	$361,580

The two funds differ by 0.9 percentage points in fees, yet the final balance differs by about $76,051. That is about 17% less money at the end, and the whole gap comes from the fee. The investor in the second fund paid a high price for something that looks small in the brochure.

−$76,051

The cost of a 1% annual fee versus a 0.1% fee in this example over 30 years.

Types of investment costs

Expense ratio: the ongoing yearly fund cost.
Advisory fee: a percentage charged by a financial adviser or platform for managing your account.
Trading costs: commissions and the spread when buying or selling.
Sales charges (loads): a fee charged when buying or selling certain funds.
Taxes: not a fee, but frequent trading can trigger taxes in many countries.

Questions to ask

What is the total annual cost, including the fund and any platform or adviser fee?
Are there any sales charges or exit fees?
What am I receiving for the extra cost? Higher fees can be reasonable if there is a clear service, but they should be justified.
How does this compare with similar funds? Comparison tools on regulators’ and fund-research websites can help.

The limits of the example

The 7% figure is a modelling assumption. A real fund’s return varies, and a more expensive fund might outperform or underperform. Past performance does not guarantee future results. The point of the example is to show how large the effect of a fee is when compounded, not to recommend any product.

Common questions

Where do I find a fund’s expense ratio?

It is listed in the fund’s fact sheet or key information document, and on most investment platforms.

Is cheaper always better?

Not automatically. Costs are one factor alongside risk, diversification, tax treatment and your goals. But since costs are certain and returns are not, they deserve attention.

Can I test this myself?

Use the compound interest calculator twice, once with the gross rate minus a small fee and once minus a large fee. For background on compounding, read how compound interest works. This is education, not investment advice.

Common mistakes to avoid

Looking only at the headline fund fee and ignoring platform, adviser and trading costs.
Assuming a high fee guarantees better results. Higher cost does not promise higher return.
Comparing funds with different goals by fee alone.
Forgetting that fees apply to the entire balance, so they grow as your savings grow.

Quick glossary

Expense ratio: Yearly fund cost as a percentage of assets.
Load: A sales charge when buying or selling certain funds.
Net return: Return after costs have been deducted.
Gross return: Return before costs.

Try it yourself

Run the compound interest calculator twice with the same contributions: once at your expected return minus 0.1%, once minus 1%. Compare the ending balances to see what the fee difference costs.