The mutual fund expense ratio is the amount of money investors have to pay in order to cover the operating expenses of a mutual fund. This fund is made up of several different expenses that investors have to pay for. The mutual fund expense ratio is comprised of the management fee, administrative costs, distribution costs, and other operating expenses.
The mutual fund expense ratio is not the same thing as a sales charge. When an investor get involved with a mutual fund, he or she may have to pay a commission to purchase shares. This is known as a sales load or a sales charge and it is separate from the mutual fund expense ratio.
The first part of the mutual fund expense ratio is the management fee. This fee is also sometimes referred to as an investment advisory fee. This is the amount of money charged by the mutual fund company to cover the salaries of the fund managers. The mutual fund managers make all of the individual investment decisions for the fund and this fee is going to cover the costs to retain them.
Another part of the mutual fund expense ratio is the administrative costs. This is a charge that is going to cover all of the ordinary costs of running a mutual fund business. This is going to cover all of the administrative costs such as paying for a customer service center, rent for an office, and legal costs.
The distribution costs are other costs that are going to be included in the expense ratio. Some mutual funds do not charge for this expense. This fee is also known as a 12b-1 fee. The distribution costs are going to cover the cost of advertising and direct mailings in order to gain new customers for the mutual fund.
This fee does not directly help the investor, but it does help the fund bring on new customers. This fee does not improve the performance of the fund and has led to a great deal of controversy surrounding this type of fee. This has led to many mutual funds eliminating this fee from the expense ratio.
Other operating expenses will also be charged as part of the expense ratio. Any charges that are not directly covered under the management fee, administrative costs, or distribution costs will fit into this category. Typically, this is a small part of the ratio and is used to cover miscellaneous charges.