Examining the EXPENSE RATIO of a given mutual fund is extremely important before investing. If you don’t look at the expense ratio then you could find yourself investing in a high performing fund that pays less than the lesser performing funds do. This is all because of what is know as the expense ratio, also referred to as the management expense ratio. The two are used almost interchangeably so keep that in mind when you are selecting a fund.
Essentially the expense ratio is the amount of overall costs that a fund incurs through it’s operations. This amount generally is based upon the costs to operate the fund including taxes, interest expenses, services provided to the investors, and of course brokerage fees. The expense ratio, also includes the portfolio managers fee, which is the part of the expense ratio that directly is called management expense ratio. This is the actual share that the portfolio manager takes for his management of the fund. The more active a portfolio manager is with the fund, the larger percentage you can generally expect them to take.
The expense ratio is taken directly from the fund’s assets. This is important because it directly affects the amount of money that particular fund has available to invest. This of course directly affects each individual investors’ rate of return. If your fund has a higher expense ratio, but doesn’t perform that great, you might find that you aren’t making any money off of that particular fund. So it is very important that you look to find a performing fund that has a relatively low expense ratio. This will ensure the best possible return for your money.