Expense Ratio

The expense ratio measures the percentage of a mutual fund's assets dedicated to running the fund. If the expense ratio is 1%, then each year the total money in the fund is reduced by 1% to pay expenses. The expense ratio comprises administrative costs, like record keeping and mailing; the 12b-1 distribution fee, used for marketing, distributing, and advertising the fund; and the investment advisory fee, used to pay the manager(s) of the fund. An actively managed stock fund usually has a relatively high expense ratio of perhaps 1.5%, while an indexed stock fund usually has a much lower expense ratio of maybe 0.25%. Also note that, for loaded funds, the expense ratio does not include sales charges. Naturally, a fund with a high expense ratio must perform significantly better than a fund with a low expense ratio to give fund holders the same return. Some high expense ratio funds manage to meet this hurdle, however, and investors shouldn't automatically avoid high expense ratio funds. A fund's expense ratio is easily available from websites like Morningstar and Yahoo Finance.

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