The Average Mutual Fund Expenses
The expenses of a mutual fund are provided by the mutual fund company in the fund's prospectus. Investors researching mutual funds should compare the expenses of the different funds. All funds charge some level of expenses, but a high expense ratio can reduce the investment returns for a mutual fund's investors.
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Identification
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Mutual fund expenses are the ongoing expenses to manage and market a fund. A fund's expenses are listed as an expense ratio, which is an annual percentage of the mutual fund's assets. The expense ratio includes the management of the portfolio, administration, shareholder services and bookkeeping costs. An additional expense called a 12b-1 fee can be charged by funds for marketing costs of the fund. If a fund has a 12b-1 fee, it's listed separately and included in the total expense ratio.
Considerations
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The average mutual fund expense ratio will vary by the type of mutual fund. The Investment Company Institute (ICI) publishes mutual fund expense data in its annual fact book and divides mutual funds into the categories of stock funds, bond funds, hybrid --- stock and bonds together --- and money market funds. Index mutual funds that don't have actively managed security portfolios usually have expenses significantly lower than those of actively managed funds.
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Average Expense Ratio Types
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The 2010 Investment Company Institute Fact Book provides the average mutual fund expenses calculated several different ways. The simple average is the mathematical average of the expense ratios. The median is the expense ratio where half the funds have higher expenses and half of them have lower expenses. The asset-weighted average gives more weight to the ratios of funds with more assets in the fund portfolios.
Fund Expenses by Category
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Here are expense ratios for the different mutual fund categories as of October 2010. The expenses are listed in order of simple average, median expense ratio and asset-based average expenses:
Stock mutual funds: 1.52 percent, 1.44 percent and 0.87 percent
Bond mutual funds: 1.08 percent, 0.96 percent and 0.65 percent
Hybrid mutual funds: 1.28 percent, 1.20 percent and 0.84 percent
Money market mutual funds: 0.54 percent, 0.50 percent and 0.34 percent
Significance
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The ICI Fact Book notes that investors in mutual funds are looking for lower expenses. More money goes into the funds with lower expense ratios. The result is the difference between the average expense ratio and the asset-based average expenses. During the period from 2000 to 2009, the stock mutual funds in the lowest 25 percent by expense ratio received almost 80 percent of new fund investments.
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