Mutual fund expense ratio is a measure of how much it costs a financial institution or investment bank to operate a mutual fund and is normally expressed as a percentage of total fees that are charged. Expense ratio includes common charges such as administrative fees, manager/investment advisor fees, 12b-1 fees, etc. An industry standard average for an actively managed fund is 1.25% of total investment purchase. This percentage varies from one fund to another and is usually lower for an index mutual fund that tries to benchmark the returns of an Index such as the S&P500 or the Dow Jones Industrials. On the other hand, an actively managed mutual fund requires the services of a sophisticated & qualified mutual fund manager who actively manages individual investments to make the highest capital gains possible. This is why actively managed funds tend to have higher expense ratios than Index funds.

Why is the expense ratio a very important topic to investors? Compare 2 mutual funds, one has a ratio of 0.10% while the other has a 2.10% ratio. In order for the 2nd mutual fund to just break even, it has to earn a 2.10% return on its total assets while the first fund just has to make 0.10% in order to bring money to investors’ pocketbooks. Over the long term, by far the fund with a 0.10% expense ratio will perform far better than the fund with 2.10 expense ratio simply because of the lesser expenses involved. What are some of the typical fees that are charged by mutual funds?

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