Basis Point
Definition
One hundredth of a percent (0.01%). Used to describe small changes in interest rates or fees. If rates rise from 2.5% to 2.75%, that's a 25 basis point increase. In mutual funds, 0.10% fee equals 10 basis points.
Why It Matters
Basis points matter because small fee differences compound hugely. A 1% fee vs 0.1% fee is a 90 basis point difference. Over 30 years, that 0.9% costs you tens of thousands in returns.
Example
Two index funds: one with 0.03% fee (3 basis points), one with 0.20% fee (20 basis points). On $500,000 over 30 years at 7% returns, you lose about $80,000 in returns to the higher-fee fund. Same investment, just fees.