If a mutual fund has an expense ratio of 1%, what does that mean for your returns?

The correct answer indicates that if a mutual fund has an expense ratio of 1%, your returns will be reduced by that 1%. The expense ratio represents the annual fees that investors pay for the management and operation of the mutual fund, expressed as a percentage of the fund's average assets under management.

For example, if your investment in the mutual fund grows by 5% over a year, the fund will take 1% of your investment for expenses, which means you will only benefit from a net return of 4%. Hence, the expense ratio directly impacts the returns you receive from your investment because it is a cost deducted from your gross returns.

This concept emphasizes the importance of considering expense ratios when selecting mutual funds, as lower expense ratios can lead to significantly better returns over time, especially with compound growth. Understanding this helps investors make informed decisions in their personal finance and investment strategies.