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expense ratio |
Also found in: Acronyms, Encyclopedia, Wikipedia | 0.03 sec. |
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Expense Ratio The percentage of total fund assets that is used to cover expenses associated with the operation of a mutual fund. This amount is taken out of the fund's assets and lowers the return that fund holders achieve. These expenses include management fees and operating expenses. The management fee is the fee that is charged to the fund by the portfolio manager, and it is often a fixed percentage. The operating expenses are the expenses that the fund incurs through operation and this can include brokerage fees, taxes, investor services, and interest expenses. Also known as the "management expense ratio" (MER). Notes: The amount of the MER is usually dependent on how active the portfolio manager is in the trading of the fund an actively managed fund will have a higher ratio than an index fund, for instance. It is important for investors to be aware of the MER as it affects the rate of return that an investor in the fund achieves. The amount of the MER must be stated in the fund's prospectus.Expense ratio The percentage of the assets that are spent to run a mutual fund (as of the last annual statement). This includes expenses such as management and advisory fees, overhead costs, and 12b-1 (distribution and advertising) fees. The expense ratio does not include brokerage costs for trading the portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of Additional Information (SAI). The SAI is available to shareholders on request. Neither the expense ratio nor the SAI includes the transactions costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio (OER).
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On average, an investor pays 1% to 2% in expense ratio fees, which include management fees, 12b-1 fees, and fees for general operating costs such as fund Websites, semiannual reports, and 800-numbers. The health care expense ratio at the public, for profit companies decreased by 30 basis points in 2005 but was a full percentage point higher than the health care expense ratio in 2003. The increase in the combined ratio reflected the higher net expense ratio which more than offset the decline in the loss ratio. |
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