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Close up of a man typing numbers into calculator to calculate his mutual funds expense ratio.

Your Mutual Fund Expense Ratio: How It Affects Your Investment

The expense ratio for a mutual fund is one of the most important pieces of information you should gather. Knowing how much a mutual fund will make you is important, and you should certainly know how much the investment will initially cost to purchase.

The expense ratio, however, gives you the cost of actually earning the fund, which provides a great deal of information about its overall profitability. The expense ratio is calculated as a percent of the assets of the fund that are spent simply owning and running the fund. It is an easy way to add up all the expenses and make it easier to calculate and evaluate the fund.

The Three Parts of the Expense Ratio

The expense ratio is generally a compilation of three different expenses. The first is the management fee, which is the necessary fee paid to the manager of the mutual fund. Generally this fee is .50-1.0% of the fund's assets. Then there are administrative costs, which include smaller necessary costs like mailings, customer service lines, and record keeping. These costs are typically between .20-.40%. The most controversial fee that mutual fund investors pay is the 12b-1 distribution fee. This is used solely for the marketing and advertising of the fund, and while it doesn’t generate any value for the investor, this fee can range from .25-1.0%.

Rate Fluctuations

A report published in 2012 by the Investment Company Institute found that expense ratios have been declining slightly over the last 20 years. Equity fund expense ratios fell to .77% on average, hybrid funds to .79%, bond funds to .61% and money market funds to 17%. Generally, any mutual fund with an expense ratio that is higher than average should be avoided unless other significant factors make it valuable to your portfolio. It is important to note, however, that certain types of funds do tend to require more maintenance, thus driving their expense ratio up naturally. International funds are one obvious example since it requires more work to maintain a diverse fund when you're working with staff located around the world. You should make sure to gauge a fund against similar ones to make sure the expense ratio is a favorable one.

Finding the Expense Ratio

The best way to avoid or fix a portfolio with a low expense ratio is to properly research mutual funds and purchase those with good rates. Luckily, there are several ways to determine a funds expense ratio. Your first option is checking the fund's prospectus, which should be shared with you if you are a shareholder already, or publicly available on the funds website. Next, you can try checking online financial news websites, which provide all available financial information for funds, including expense ratio. Another option is to use a fund screen website that allows you to search for similar funds by specifying certain criteria. Lastly, you can check news publications, like the Wall Street Journal, which publicize financial information.

It is important to keep a close eye on mutual fund expense ratios because of the impact it has on a fund's value over its lifetime. By keeping track and making sure your portfolio costs as little to manage as possible, you will ensure that you are making the most from your investment.

Last Updated: July 24, 2015