Expense ratio

It is a measure of the annual fund operating expenses of an investment fund. It is expressed as a percentage of the fund’s assets under management (AUM). The fund’s operating expenses include expenses on administration, management, and advertising.

The expenses can be fixed or variable and can change over time. The expense ratio depends on the size of the fund, past performance in the market, the popularity of the fund, the management style of the fund, and various other factors that lead the firm to incur additional expenses.

It is an annual fee that is charged by every fund. It is very important to calculate the returns after adjusting for the expense ratio as it can significantly affect the returns. Usually, funds that are new have a lesser expense ratio to attract more investors.

A fund’s management fee is also included in the expense ratio.

Formula for calculating expense ratio is –

What is the difference between the gross expense ratio and the net expense ratio?

The net expense ratio includes waivers, reimbursements, and trading costs, whereas the Gross expense ratio is equal to the percentage of total mutual fund assets used to run the fund.

The expense ratio is a measure of the annual fund-operating expenses of an investment fund. It is expressed as a percentage of the fund’s assets under management (AUM). The fund’s operating expenses include spends on administration, management, and advertising.