Wouldn’t it be amazing if someone gave you 1% returns for free? Now, imagine if you had to give away 1% for no reason. That would be painful, right? Most of us hate paying fees, and all of us prefer to save on costs wherever we can. But this is exactly what we end up paying for when mutual funds hold high cash balances.
Mutual fund expense ratios exist because there are costs associated with managing the fund—transaction costs, salaries of researchers and portfolio managers, etc.; while the extent of this is debatable, it still makes sense. What doesn’t make sense is when these mutual funds hold high cash balances, we are effectively paying them for doing nothing, i.e. giving them free money.
