Expense Ratio

Expense Ratio: The expense ratio is a measure of the costs associated with managing an investment fund, expressed as a percentage of the fund’s total Assets. It includes various expenses such as management fees, administrative costs, and other operational expenses incurred by the fund. A lower expense ratio indicates more of the fund’s Returns are passed on to investors, while a higher ratio can erode overall Returns.

Example: If a mutual fund has an expense ratio of 1.5%, it means that for every $1,000 invested, $15 per year will be deducted for expenses.

Case: Consider two funds: Fund A has an expense ratio of 0.5%, while Fund B has an expense ratio of 1.5%. If both funds generate a return of 6% over a year, the net return for an investor in Fund A would be 5.5% (6% – 0.5%), while for Fund B, it would be 4.5% (6% – 1.5%). The difference in expense ratios significantly impacts the investor’s net Returns.