Expense ratios are yet another factor that is very important to look at when buying a mutual fund. You can calculate a funds expense ratio by dividing annual expenses by average net assets. A fund's expenses typically include adviser's fees, legal and accounting fees, 12b-1 fees, but not commissions, interest on loans or income taxes. An expense ratio of over 2% is considered exorbitant.
Funds that perform poorly year after year have high expense ratios. That makes sense. Obviously, these funds are not managing their expenses to the highest level of efficiency, and this results in poor performance. But these numbers can be misleading. Consider this: A mutual fund allows investors in with a very low initial minimum investment. As a result, it will have a high expense ratio because it is more expensive to deal with a large group of small investors than a small group of large investors.
The Wiesenberger Investment Companies Service provides this type of information about funds. Here are some of the expense ratios of different types of mutual funds, not all of which are discussed in this page, for simplicity's sake:
Expense Ratios for Various Mutual Funds
|Type of Mutual Fund||Expense Ratio (in %)|
|ALL MUTUAL FUNDS||1.15|