6,467 Reasons to look at the expense ratios on your mutual funds according to ChatGPT.

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Assume that I invested $10,000 in two mutual funds, one with a .17% expense ratio and one with a 1% expense ratio. Assuming annual growth of 8%, what would each fund be worth in 20 years?ChatGPT

ChatGPT

To calculate the future value of your investments in the two mutual funds, considering their different expense ratios, we’ll use the formula for the future value of an investment compounded annually:

𝐹𝑉=𝑃×(1+π‘Ÿβˆ’πΈπ‘…)𝑛FV=PΓ—(1+rβˆ’ER)n

Where:

  • 𝐹𝑉FV is the future value of the investment.
  • 𝑃P is the principal amount (initial investment).
  • π‘Ÿr is the annual growth rate.
  • 𝐸𝑅ER is the expense ratio.
  • 𝑛n is the number of years.

For your investments:

  • 𝑃=$10,000P=$10,000
  • π‘Ÿ=8%r=8% or 0.08
  • 𝑛=20n=20 years
  • 𝐸𝑅ER is 0.17% (0.0017) for the first fund and 1% (0.01) for the second fund.

Let’s calculate the future value for each fund.

After 20 years of growth at an annual rate of 8%, the future values of your investments in the two mutual funds would be as follows:

  1. The fund with a 0.17% expense ratio would be worth approximately $45,164.
  2. The fund with a 1% expense ratio would be worth approximately $38,697.

The lower expense ratio results in significantly greater investment growth over the same period due to lower annual costs detracting from the compounding interest. This example underscores the impact of expense ratios on long-term investment returns.