In a mutual fund, annual operating expenses as a percentage of assets are called the expense ratio.
The expense ratio is usually expressed as a percentage of a fund’s average net assets. It covers costs such as investment management, administration, recordkeeping, legal services, and accounting. For example, a 0.50% expense ratio means the fund’s annual operating expenses equal about 0.50% of its assets before considering investment performance.
Fund expenses are deducted from the fund’s assets rather than normally billed as a separate invoice to each investor. This means the published return is generally reported after the fund’s operating expenses have been taken into account. Over long periods, even small differences in expense ratios can affect compounded results.
The expense ratio is not the same as a fund’s trading costs, sales load, or an investor’s tax liability. Some funds advertise a temporary waiver or reimbursement that lowers a stated net expense ratio; the gross ratio may be higher. Comparing similar funds therefore requires checking both the expense ratio and the services or strategy the fund provides.