SML-151: Monthly Review - Comparing Two Mutual Funds on Expense Ratio and Returns
When comparing two funds, don't just look at one number. Use this simple checklist every month or when you want to switch funds.
Step 1: Check the category first
Only compare funds within the same category (SML-146). Comparing a large-cap fund with a small-cap fund is not fair - they carry different risk levels.
Step 2: Compare the expense ratio
Check the TER (Total Expense Ratio) of both funds (SML-131). A lower expense ratio means more of the return stays with you, not the fund house. But remember - a slightly higher expense ratio can still be worth it if the fund consistently delivers better returns after costs.
Step 3: Compare returns across multiple time periods
Don't look at just 1-year returns. Check 1-year, 3-year, and 5-year returns for both funds (SML-137). A fund that looks great over 1 year may not be strong over 5 years, and vice versa.
Step 4: Compare returns against the benchmark, not just each other
A fund returning 12% sounds good - but if its benchmark index returned 14% in the same period, that fund actually underperformed (SML-123). Always check both funds against their own benchmark first.
Step 5: Check risk-adjusted return, not just raw return
A fund with a higher return but much higher volatility may not actually be the better choice. Use Standard Deviation (SML-103) and Sharpe Ratio (SML-148) to see which fund gave smoother, more efficient returns for the risk it took.
Step 6: Check consistency, not a single good year
A fund that stays steady across multiple years is often a safer choice than one with one outstanding year and several weak ones (SML-149).
A simple example:
| Metric | Fund A | Fund B |
| Category | Large-cap | Large-cap |
| Expense Ratio | 1.8% | 1.2% |
| 3-year Return | 13.5% | 14.2% |
| 5-year Return | 12.8% | 13.0% |
| Standard Deviation | 15% | 12% |
Here, Fund B has lower cost, slightly better returns, and lower volatility - it looks like the stronger choice across most metrics, not just one.
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Never pick a fund based on expense ratio alone, or return alone. Compare both funds on cost, return over multiple periods, performance versus benchmark, risk-adjusted return, and consistency - together, not one at a time. A fund that wins on every single metric is rare; the goal is to see which fund wins on the metrics that matter most for your own goals.