By YOUNG MONEY Staff
13 August 2010

Young entrepreneurs and investors take note - when looking at a mutual fund's prospectus, the expense ratio remains the most important number on the page. That's the conclusion of a new study by Morningstar (NASDAQ: MORN), an independent investment research firm.

Morningstar is famous for its "star" ratings, which rate funds on the basis of risk- and load-adjusted returns. Recently, though, the company did a study on how often the rating beat expense ratios as a predictor of returns - and found that more than 50 percent of the time, expense ratios were the better choice.

An expense ratio, briefly, is the percentage of your capital you pay to put your money in a fund. If your expense ratio is one percent per year, then the fund needs to return at least that much annually for you to break even.

Morningstar found that cheaper funds with lower expenses delivered better returns, were more likely not to be liquidated and were less risky. In a group of funds tracked through 2005, 48 percent of the cheapest quintile of funds "survived" and outperformed the market, compared to 24 percent of the most expensive quintile.

Morningstar ratings can be helpful, and investment strategies differ. But when choosing a fund, look to the bottom line: The lower your expense ratio, the more of your money you get to keep.