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Expense Ratio
The operating expenses of a mutual fund or similar security, combined with any 12b-1 fees. An expense ratio is noted as a percentage, and essentially is deducted from the overall investment return. For example, if a mutual fund charges a 1.25% expense ratio, and its investments earn 9.25% in a given year, the investors earn an 8% return. (This assumes no purchases or redemptions during the year.) If the same fund’s investments lose 2.0% in a year, the investors would earn -3.25%.
Other expenses to consider are commissions or loads (charged by non-fee-only advisors), and transaction fees (charged by fee-only advisors’ custodians to execute trades).
For more information on mutual fund fees, check out the Investment Company Institute’s Investor Awareness series (PDF).
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