Expense Ratio

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

  1. 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.
  2. Administrative costs are the costs of record keeping, mailings, maintaining a customer service line, etc. (0.2-0.4%).
  3. The 12b-1 distribution fee (0.25-1.0%). This fee is used for marketing, advertising, and distribution services meant to sell the fund.

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