The costs of owning a fund are called the expense ratio. The expense ratio represents the percentage of the fund’s assets that go purely toward the expense of running the fund: the investment advisory fee, the administrative costs, the 12b-1 distribution fees, and other operating expenses.
The expense ratio for an actively managed mutual fund is usually about 1.5%, which means the mutual fund retains 1.5% of the total money (current assets) in the fund every year, regardless of how good or bad the fund is doing.
Components of the Expense Ratio
- The investment advisory fee or management fee is the money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund’s assets.
- Administrative costs are the costs of record keeping, mailings, maintaining a customer service line, etc. (0.2-0.4%).
- The 12b-1 distribution fee (0.25-1.0%). This fee is used for marketing, advertising, and distribution services meant to sell the fund.