Bob Brinker's Marketimer

  Tuesday November 21, 2017

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HOW DO YOU CALCULATE AN EXPENSE RATIO?
Learn even more about this topic with the Encyclopedia of Personal Finance™

You need only a calculator to figure the expense ratio of a mutual fund. A fund manager simply adds all of the fund's management and operating expenses and then divides that number by the total amount of the fund's investments. For example, say a new fund has invested $20 million in various securities. Its managing and operating expenses the first year total $300,000. Divide the $300,000 in expenses by the $20 million in assets, and you will learn that the expense ratio is 1.5 percent.

To calculate the effect of the expense ratio on your own mutual fund investment, multiply the expense ratio by the total amount you have invested in the fund. For instance, if you have invested $10,500 in a mutual fund, and the fund's expense ratio is 1.5 percent this year, you can multiply $10,500 by 1.5 percent. You then learn that your share of the fund's management and operating expenses totals $157.50 for that year.

Given the total amount invested, the expense ratio sometimes seems almost too insignificant to notice. Yet over time, it can have a large impact on a fund's total return; as a result, many investors pay close attention to this figure. And when these investors comparison shop for mutual funds, the expense ratio may be a deciding factor in their buying decisions.

Next, we will look more closely at the specific expenses involved.




LEARN EVEN MORE WITH THE ENCYCLOPEDIA OF PERSONAL FINANCE. CLICK HERE!

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