WHAT EXPENSES DOES AN EXPENSE RATIO INCLUDE?
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The performance of a mutual fund depends heavily on the market
experience and expertise of its professional managers, so salaries, benefits,
and perquisites comprise a large portion of a fund's expenses. Investment firms
often need a number of analysts who specialize in different investment areas and
industries in order to make good fund allocation decisions.
Expense ratios also include the types of office and
administrative expenses you would expect to find in any information-dependent
company. A fund might require support staff, computers plus related peripherals
and software, the latest in telecommunications technology, and other standard
office equipment. Add offices and conference rooms, utilities, insurance, and
rent or mortgage payments, and you have a fair idea of the most common
In addition, the performance of a mutual fund depends heavily on
how many shares the fund sells.
As a result,
some funds charge 12b-1 fees, which cover advertising,
marketing, and other costs related to distributing fund shares.
The Securities and Exchange Commission (SEC) approved its 12b-1
rule in 1980, and mutual funds that charge these fees include them in their
Funds that seek
individual investors as clients—as opposed to institutional
funds that focus on investing for foundations, retirement plans, and
other large organizations—more often depend on advertising and marketing
promotions to recruit new investors.
Now that you know what the expense ratio is, where do you
find it? We're glad you asked! This is the topic of the next