The expense ratio of a mutual Fund is very important for investors, as the financing of operating and management fees can have a big impact on net profitability. The expense ratio for the Fund is calculated by dividing the total value of the Fund’s assets, the total amount of fees, both Fund management fees and operating expenses charged to the Fund’s investors.
Expense ratios for mutual funds generally ranges from 0.1% to 2.5%. The average ratio of funds index is considerably lower than for actively managed funds portfolio, usually not more than approximately 0.25%. Expense ratios for actively managed funds often are in the range from 0.75% to 1.25%, and some funds have much higher expense ratios.
Most investors do not understand the significant impact a seemingly small percentage difference in the mutual ratios of the Fund, but the example easily demonstrates that even a relatively small difference has a significant impact on the amount of profit from the investment.
Consider two investment funds, generating average annual investment income rate of 5%, with one Fund charging fees of 1% and the other charging 2%. One difference may not seem significant for most investors, but that’s because the amount of compensation based on assets under management instead of earned income.
Suppose two investors to start the year with the appropriate 100,000 $investment for 1% and 2% expense ratio of the funds and each Fund generates a 5% return on investment before fees are deducted. The investor is charging 1% in fees is losing us $1,000(1% of 100 000) profit 5,000 and fees. The investor pays 2% in fees pays $ 2,000 its profit for$ 5,000. Thus, the small 1% difference in the ratio of the account is transferred to as much as 10% difference in net profit.
(For associated reading, see: pay attention to the expense ratio of Your Fund.)