Expense Ratio

The expense ratio is a measure of the annual operating expenses of an investment fund, expressed as a percentage of the fund’s average net assets. It includes management fees, administrative costs, and other expenses related to running the fund but excludes brokerage fees and commissions. The expense ratio directly affects an investor’s returns, as higher expenses reduce the net returns earned from the investment. Investors use the expense ratio to compare the cost-efficiency of different funds, with lower expense ratios generally being more favorable, especially in passive funds like index funds and ETFs.

Example

A mutual fund with an expense ratio of 1% charges $10 annually for every $1,000 invested, covering management and administrative fees.