Understanding the Mutual Fund Expense Ratio

The mutual fund expense ratio (or management expense ratio) is a measure of the cost the investment company incurs to operate the fund. It is expressed as an annual percentage of invested assets that the investment company retains to pay for the management and operation of the fund. These operating expenses are deducted from the fund’s assets and decrease the return to the fund’s investors. The expenses are known as the “load” the fund carries.

Expenses Associated with Mutual Fund Management

Depending on the type of fund, the expense ratio can vary widely. While the largest portion of the expenses going to the fund’s manager other costs can include recordkeeping, taxes, legal expenses, custodial and accounting fees. Some funds also incur a 12b-1 fee which is a marketing cost that would also be included in the fund’s operating expenses.

Expenses associated with the fund’s trading activity are not included in the calculation of the expense ratio. Also note that the expense ratio does not include sales charges.

The Mutual Fund Expense Ratio and Your Invesment Decision

The expense ratio of a mutual fund, along with the fund’s historical performance, should be a key component when choosing a mutual fund for investment. Information about a fund’s expense ratio can be found in its prospectus. A fund’s expense ratio can also be found on websites like Yahoo! Finance.

Typically, the expense ratio for a mutual fund is between 1 percent and 1.5 percent. Expenses will usually be lower for index funds and higher for specialty funds. Of course, a fund with a high expense ratio will need to perform better than a fund with a low expense ratio to offer investors the same return. Some high expense ratio funds do manage to meet this hurdle.

The Expenses Ratio and Fund Performance

There is, however, no evidence to support the arguments from many brokers and financial planners (many of whom earn commissions from selling load funds) that load funds outperform no-load funds. In fact, historically, most mutual funds have tended to under-perform the broader market by roughly the same amount as their annual expense ratio.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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