The gross expense ratio is the top-level fee. That can make a significant difference in what you end up paying over time. Index funds often have expense ratios below. It is not uncommon to see active funds with expense ratios over 1%. This means that the fees for running these funds are much lower than the fees for actively managed mutual funds. One of the biggest reasons for owning index funds is the passive nature of their investment selection process. 25% 12b-1 fee = 1.00% gross expense ratio Active vs. Enjoy!Īgain, these fees will vary but as a basic illustration the total fee for owning a fund might look like this: The next time you have friends over for dinner and see a commercial for your favorite mutual fund remember you paid for it. That brochure you were handed with the fancy gloss? That was paid for by the 12b-1 fees. 12b-1 Fee – This is a rather notorious fee.The admin fee covers administrative expenses like general overhead of operating the fund. Administrative Fee – This is pretty self-explanatory.This fee covers the expenses associated with this activity. ![]() Different investment committees could be responsible assessing particular sectors and making recommendations to a general or senior management team. There are different structures that guide how these decisions are made. ![]() Management Fee – What does a mutual fund buy and sell? Mutual fund managers make those decisions.These vary by fund, but there are three basic underlying fees that make up the total expense ratio: The gross expense ratio is a combined expense. In simplified terms, a fund with a 1% expense ratio that reports a 10% return for the year would have reported an 11% return were the expense ratio 0%. The fund will deduct expenses from assets owned by the fund before reporting returns. If the expense ratio is 1% you’ll pay $1,000 in expenses over the course of a year. Suppose you have $100,000 invested in a certain mutual fund. What is a Gross Expense Ratio?Īs I mentioned before, the gross expense ratio is the cost of owning the fund on an annual basis. That is where the expense ratio comes in. Then, you have the ongoing cost of owning a given fund. Some firms now even offer to transact all funds for no transaction fee. You’ll often see these appropriately named something like “No Transaction Fee Funds”. Recently, there has been a significant trend for the major firms to eliminate ticket charges for some funds. Ticket charges are what the custodian firm charges for handling the logistics of the transaction. This is what compensates commission-based brokers and advisors for selling you a mutual fund. Sales loads, commissions, and ticket charges are all costs of purchasing mutual funds. These are the expenses you pay for buying and selling the fund. There are two basic ways to categorize the expenses of investing in mutual funds.įirst, there are transaction costs. Ongoing Expenseīefore we get into what a gross expense ratio is, let’s first clarify the type of expense it is. ![]() Investment expenses matter a great deal, so this is a figure you should be aware of and understand. Fund families will often rebate portions of the fee so that your actual expense is lower than the gross expense ratio. It tells you the total expense of owning the fund as a percentage of your investment. A gross expense ratio is the annual cost of operating a mutual fund or ETF.
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