The Facts

Expense ratio refers to the cost of running the mutual fund. It is calculated by dividing the fund’s operating expenses by the average value of all of the fund’s assets. These fees are charged regardless of any gains or losses of the fund, and are paid before any money is returned to the investors. Expense ratios vary greatly between funds, so you should pay attention to the fees charged by different funds, as this will directly affect your returns.

Features

While expenses are necessary and unavoidable, mutual funds are able to control the amount of the expense ratio by how well they control operating costs. More actively managed funds will naturally have a much higher manager’s fee. If a fund charges a 12b-1 fee, one that advertises heavily on television and radio will naturally have a much higher expense ratio than one that markets through direct mail. The location of a fund’s offices and the size of its staff also have an effect on its costs.

Considerations

Pay attention to expense ratios when comparing mutual funds. Some funds, especially smaller funds or those in more specialized sectors, can have expense ratios of 2 percent or more. Index funds, which are not actively managed, typically have much lower fees, with expense ratios as low as 0.2 percent. Look carefully at this number when comparing different mutual funds. The expense ratio also does not take into account any sales charges (called loads) or redemption fees. These fees, if applicable, are paid directly to the fund by investors, not taken out of assets.

Warning

Resources

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