An expense ratio is an annual fee expressed as a percentage of your investment or, as the term implies, the proportion of your investment that goes toward fund expenses. The expense ratio is determined by dividing a fund's operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund's assets and therefore reduce returns for investors. As each fund exceeds the end of the fiscal year, the annual expense ratio is calculated by dividing the fund's operating expenses by its average net assets.
If the fund's assets increase faster than their costs, you'll enjoy lower expenses as a fund shareholder. The expense ratio of a stock or asset fund is the total percentage of the fund's assets used for administrative, management, advertising (12 billion) and all other expenses. A spending ratio of 1% per year means that 1% of the fund's total assets will be used each year to cover expenses. The expense ratio does not include sales burdens or brokerage fees.
Expense ratios are deducted from mutual fund and ETF statements to help pay for operations and fund management. The term is also widely used among finance and accounting professionals to demonstrate the profitability and viability of a company's operations. Other costs include record keeping, escrow services, taxes, legal expenses, and accounting and auditing fees. Income statements) for drafting business plans consider expenditure ratios to be very useful indices for making forecasts and determining where there are opportunities for reducing costs and maximizing revenues.
It is useful to know the expense ratio, which includes all administrative, marketing and management fees and is essentially the ratio between the fund's net operating expenses and the fund's net assets. Other costs included in a fund's spending ratio are taxes, legal fees, accounting and auditing, and record keeping. Mutual funds charge management fees to cover their operating costs, such as the cost of hiring and retaining investment advisors who manage the fund's investment portfolios and any other payable management fees not included in the category of other expenses. Actively managed mutual funds tend to have a higher expense ratio than passively managed funds, mainly because passively managed funds do not have managers and researchers who actively choose assets to buy and sell.