HOW DO YOU CALCULATE AN EXPENSE RATIO?
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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.