» Dictionary of Mutual Fund Terms » Expense Ratio

Expense Ratio

Expense Ratio: The expense ratio of a fund represents its operating expenses during one year, which is presented as a percentage of its average net assets. In the value of the operating expenses should be included distribution fees, management fees and etc.

On the other hand, transaction costs, such as brokerage costs, are not included in the expense ratio.

The amount of the expense ratio is not an indicator of the performance of the fund. Additionally, the bigger the value of the expense ratio, the lower the returns for the investors since the money for the expenses represent money that will not reach their wallets. For example, take the case of two funds that have made 10% return before fees. If you put your money in the first fund, where the expense ratio is 3% more than in the second fund, each year you will deprive yourself of additional 30% of the expected returns.

For instance the fund advisor stressed several times that it is important to compare expense ratios when selecting an index fund.

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