Expense Ratios Definition

Mutual Funds expense ratios are somewhat of a mystery to many investors. These expenses range from below .1% for some index ETFs and go up to around 2% from some actively managed mutual funds. These fees are not painful for investors to pay, because they are wrapped into the daily pricing of the funds and are virtually invisible. In other words, an investor never writes a check for these fees nor is there a line item on a statement showing these fees were deducted. The fees generated from the expense ratio of mutual funds are used to compensate many people: money managers, investment advisors, administrative staff, distributors, custodians, and others. In many cases, a mutual fund company will offer several share classes for the same fund with the primary difference between the share classes being the size of the expense ratio. The fund company is required to disclose its expense ratio in its prospectus, so read it carefully.

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