How does Portfolio Turnover affect my investment?
may result in more taxes when Fund shares are held in a taxable   account. When the fund manager decides to sell shares of a stock, and those shares have grown in value, that growth is a capital gain. If that fund is part of a taxable account then the investors in the fund will have to declare that income/gain on their tax forms. That could require the investors to have to pay taxes on those gains.  Of course if the investors are holding the fund shares in a IRA or 401K then there are no taxes due in the near term. A higher portfolio turnover rate may indicate higher transaction   costs...  ...These costs, which are not reflected in annual fund operating   expenses or in the previous expense examples, reduce the Fund’s   performance. The annual fund operating expenses are the expenses that they can assume will happen every year. They include salaries, the cost of producing statements, paperwork required by the government, research... It doesn't include transaction costs. Which they can't estimate what they will be in advance. If the fund invests in a particular segment of the market, and there is a disruption in that segment, they may need to make many new investments. If on the other hand last year they made great choices the turnover may be small this year. During the most recent fiscal year, the Fund’s portfolio turnover rate   was 3% of the average value of its portfolio. That may be your best indicator. "As Kurt Vonnegut said, the way to make money is to be there when large amounts of money are changing hands and take a little for yourself; they'll never notice. That's what transaction costs are: when a fund buys or sells stocks a bit of the money goes to the folks who handle the transaction. When you personally buy or sell stocks a bit of the money goes to the broker in the form of a fee. (and, no, no fee brokers don't work for free; they just hide the fee by not getting you the best possible price). So frequent transactions (i.e., higher portfolio turnover) mean that those little bits of money are going to the intermediaries more often. That's what ""higher transaction costs"" refers to -- the costs are higher than in a fund that buys and sells less often. In short, those higher transaction costs are a consequence of higher turnover; nothing nefarious there."
"One alternative to bogleheadism is the permanent portfolio concept (do NOT buy the mutual fund behind this idea as you can easily obtain access to a low cost money market fund, stock index fund, and bond fund and significantly reduce the overall cost).  It doesn't have the huge booms that stock plans do, but it also doesn't have the crushing blows either.  One thing some advisers mention is success is more about what you can stick to than what ""traditionally"" makes sense, as you may not be able to stick to what traditionally makes sense (all people differ). This is an excellent pro and con critique of the permanent portfolio (read the whole thing) that does highlight some of the concerns with it, especially the big one: how well will it do in a world of high interest rates?  Assuming we ever see a world of high interest rates, it may not provide a great return. The authors make the assumption that interest rates will be rising in the future, thus the permanent portfolio is riskier than a traditional 60/40.  As we're seeing in Europe, I think we're headed for a world of negative interest rates - something in the past most advisers have thought was very unlikely.  I don't know if we'll see interest rates above 6% in my lifetime and if I live as long as my father, that's a good 60+ years ahead. (I realize people will think this is crazy to write, but consider that people are willing to pay governments money to hold their cash - that's how crazy our world is and I don't see this changing.)" It says expense ratio of 0.14%. What does it mean? Essentially it means that they will take 0.14% of your money, regardless of the performance. This measures how much money the fund spends out of its assets on the regular management expenses. How much taxes will I be subject to This depends on your personal situation, not much to do with the fund (though investment/rebalancing policies may affect the taxable distributions). If you hold it in your IRA - there will be no taxes at all. However, some funds do have measures of non-taxable distributions vs dividends vs. capital gains. Not all the funds do that, and these are very rough estimates anyway. What is considered to be a reasonable expense ratio? That depends greatly on the investment policy. For passive index funds, 0.05-0.5% is a reasonable range, while for actively managed funds it can go up as much as 2% and higher. You need to compare to other funds with similar investment policies to see where your fund stands. "First, what structure does your index fund have?  If it is an open-end mutual fund, there are no bid/ask spread as the structure of this security is that it is priced once a day and transactions are done with that price.  If it is an exchange-traded fund, then the question becomes how well are authorized participants taking advantage of the spread to make the fund track the index well?  This is where you have to get into the Creation and Redemption unit construct of the exchange-traded fund where there are ""in-kind"" transactions done to either create new shares of the fund or redeem out shares of the fund.  In either case, you are making some serious assumptions about the structure of the fund that don't make sense given how these are built. Index funds have lower expense ratios and are thus cheaper than other mutual funds that may take on more costs.  If you want suggested reading on this, look at the investing books of John C. Bogle who studied some of this rather extensively, in addition to being one of the first to create an index fund that became known as ""Bogle's Folly,"" where a couple of key ones would be ""Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor"" and ""Bogle on Mutual Funds: New Perspectives for the Intelligent Investor."" In the case of an open-end fund, there has to be a portion of the fund in cash to handle transaction costs of running the fund as there are management fees to come from running the fund in addition to dividends from the stocks that have to be carefully re-invested and other matters that make this quite easy to note.  Vanguard 500 Index Investor portfolio(VFINX) has .38% in cash as an example here where you could look at any open-end mutual fund's portfolio and notice that there may well be some in cash as part of how the fund is managed.  It’s the Execution, Stupid would be one of a few articles that looks at the idea of ""tracking error"" or how well does an index fund actually track the index where it can be noted that in some cases, there can be a little bit of active management in the fund. Just as a minor side note, when I lived in the US I did invest in index funds and found them to be a good investment.  I'd still recommend them though I'd argue that while some want to see these as really simple investments, there can be details that make them quite interesting to my mind. How is its price set then? The price is computed by taking the sum value of all the assets of the fund minus the liabilities and divided by the number of outstanding shares.  The price of the assets would include the closing price on the stock rather than a bid or ask, similar pricing for bonds held by the fund, derivatives and cash equivalents.  Similarly, the liabilities would be costs a fund has to pay that may not have been paid yet such as management fees, brokerage costs, etc. Is it a weighted average of all the underlying stock spreads, or does   it stand on its own and stems from the usual supply & demand laws ? There isn't any spread used in determining the ""Net Asset Value"" for the fund.  The fund prices are determined after the market is closed and so a closing price can be used for stocks. The liabilities could include the costs to run the fund as part of the accounting in the fund, that most items have to come down to either being an asset, something with a positive value, or a liability, something with a negative value. Something to consider also is the size of the fund.  With over $7,000,000,000 in assets, a .01% amount is still $700,000 which is quite a large amount in some ways." Do developing country equities have a higher return and/or lower risk   than emerging market equities?  Generally in finance you get payed more for taking risk.  Riskier stocks over the long run return more than less risky bonds, for instance.  Developing market equity is expected to give less return over the long run as it is generally less risky than emerging market equity.  One way to see that is the amount you pay for one rupee/lira/dollar/euro worth of company earnings is fewer rupees/lira and more dollars/euros. when measured in the emerging market's currency?  This makes this question interesting.  Risky emerging currencies like the rupee tend to devalue over time against less risky currencies euro/dollars/yen like where most international investment ends up, but the results are rather wild.  Think how badly Brazil has done recently and how relatively well the rupee has been doing.   This adds to the returns (roughly based on interest rates) of foreign stocks from the point of view of a emerging market investor on average but has really wild variations. Do you have data for this over a long timeframe (decades), ideally for multiple countries? Not really, unfortunately.  Good data for emerging markets is a fairly new phenomenon and even where it does exist decades ago it would have been very hard to invest like we can now so it likely is not comparable. Does foreign equity pay more or less when measured in rupees (or other   emerging market currency)? Probably less on average (theoretically and empirically) all things included though the evidence is not strong, but there is a massive amount of risk in a portfolio that is 85% in a single emerging market currency.  Think about if you were a Brazilian and needed to retire now and 85% of your portfolio was in the Real.  International goods like gas would be really expensive and your local currency portfolio would seem paltry right now.  If you want to bet on emerging markets in the long run I would suggest that you at least spread the risk over many emerging markets and add a good chunk developed to the mix. As for investing goals, it's just to maximize my return in INR, or maximize my risk-adjusted return. That is up to you, but the goal I generally recommend is making sure you are comfortable in retirement.  This usually involves looking for returns are high in the long run, but not having a ton of risk in a single currency or a single market.  There are reasons to believe a little bias toward your homeland is good as fees tend to be lower on local investments and local investments tend to track closer to your retirement costs, but too much can be very dangerous even for countries with stronger currencies, say Greece. Should you care? From Vanguard: The long-term impact of investment costs on portfolio balances   Assuming a starting balance of $100,000 and a yearly return of 6%, which is reinvested Check out this chart, reflecting the impact of relatively small expense ratios on your 30 year return:  All else being equal you should very much care about expense ratios. You end up with a significantly smaller amount if your pre-expense return is the same. A 0.75% difference in ER compounds to 20% over 30 years. If so, how should I take them into consideration when comparing funds? I'm in the U.S. if that matters. If they track the same index, cheaper is better. The cases where higher expense ratios might be better are if you believe that index will outperform the market by enough to recoup the cost of the ER.  There is significant research that most funds do not do this. There is a survivorship bias in the mutual fund industry. It's not about individual stocks in which those funds invest. Rather, it's in which funds and fund companies/families are still around. The underperforming funds get closed or merged into other funds. Thus they are no longer reported, since they no longer exist. This makes a single company's mutual funds appear to have a better history, on average, than they actually did. Similarly, fund companies that underperform, will go out of business. This could make the mutual fund industry's overall history appear to be better than it actually was. Most companies don't do this to deliberately game the numbers. It's rational on the part of fund companies to close underperforming funds. When a fund has a below average history, investors will likely not invest in it, and will remove their existing money. The fund will shrink while the overhead remains the same, making the fund unprofitable for the company to run. "Generally investing in index-tracking funds in the long term poses relatively low risk (compared to ""short term investment"", aka speculation). No-one says differently. However, it is a higher risk than money-market/savings/bonds. The reason for that is that the return is not guaranteed and loss is not limited. Here volatility plays part, as well as general market conditions (although the volatility risk also affects bonds at some level as well). While long term trend may be upwards, short term trend may be significantly different. Take as an example year 2008 for S&P500. If, by any chance, you needed to liquidate your investment in November 2008 after investing in November 1998 - you might have ended up with 0 gain (or even loss). Had you waited just another year (or liquidated a year earlier) - the result would be significantly different. That's the volatility risk. You don't invest indefinitely, even when you invest long term. At some point you'll have to liquidate your investment. Higher volatility means that there's a higher chance of downward spike just at that point of time killing your gains, even if the general trend over the period around that point of time was upward (as it was for S&P500, for example, for the period 1998-2014, with the significant downward spikes in 2003 and 2008). If you invest in major indexes, these kinds of risks are hard to avoid (as they're all tied together). So you need to diversify between different kinds of investments (bonds vs stocks, as the books ""parrot""), and/or different markets (not only US, but also foreign)." Part A solution:  Assume no turnover in A.:      Average Balance * Annual Interest - Average Balance * Annual Cost of funds + Annual Fee = Profit from A        Profit From A = Average Balance * Interest Rate - Cost of Funds * Average Balance + Annual Fee     So for B here is the sneaky thing, the Average Balance is 1/12 of the Volume... That makes it really simple...       Volume * InterChange - Average Balance * Cost of Funds + Annual Fee = Profit From A       Volume = 12 x Average Balance So:       12 x Average Balance * Interchange (0.015) - Average Balance * Cost of Funds (0.04) + Annual Fee (Say 50)= Profit From A (260)       0.18* Average Balance - 0.04 * Average Balance = 210  Average Balance = 210/.14  Annual turnover = 12* Average Balance   Come @ me bro :p