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With fund expenses, how high is too high?

Say you send two teams of runners out to run a marathon, but require one team to carry 25-pound backpacks. Which team do you think is likely to have the better average time?

A fund's expenses are like those backpacks: They can drag down your total return. By contrast, a mutual fund with low expenses will have an easier time delivering you solid returns. So you want to make sure you choose a fund with an "expense ratio" - the annual cost of owning the fund, divided by your investment - that's reasonable.

What's reasonable? It depends on the kind of fund. Index funds should have the lowest fees, because they cost relatively little to run. You can easily find 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 require more research, look for an expense ratio of no more than 1.25%.

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