Saturday, September 20, 2008
Expense Ratios
| Remember that in addition to mutual funds being groups of funds that investors can buy, they may refer to companies that sell funds to people. In this case, mutual funds are like any other business. They have costs for maintenance and other expenses. An efficient fund is going to have lower expenses. The general rule of thumb is that the larger the fund, the lower its per-share cost is going to be. This is due to the fact that these mutual funds are doing business in great volume. There is definitely the economy of scale which such funds take advantage of. Expense ratios are yet another factor that is very important to look at when buying a mutual fund. You can calculate a funds expense ratio by dividing annual expenses by average net assets. A fund's expenses typically include adviser's fees, legal and accounting fees, 12b-1 fees, but not commissions, interest on loans or income taxes. An expense ratio of over 2% is considered exorbitant. Funds that perform poorly year after year have high expense ratios. That makes sense. Obviously, these funds are not managing their expenses to the highest level of efficiency, and this results in poor performance. But these numbers can be misleading. Consider this: A mutual fund allows investors in with a very low initial minimum investment. As a result, it will have a high expense ratio because it is more expensive to deal with a large group of small investors than a small group of large investors. |
posted by hearthy at 8:15 PM
