How to Calculate an Expense Ratio

In investing, an expense ratio measures how much it costs a company to operate a particular mutual fund -- how much money the company spends keeping the fund running. Here's how to calculate it.

Things You'll Need

• Mutual fund's annual report

Instructions

1. The calculation for an expense ratio is simple:Operating expenses divided by the average dollar value of assets under management.You can find this information in the mutual fund's annual report.

2. In this example, we'll use the Ameristock Mutual Fund's 2007 annual report. The fund lists its operating expenses as $4.6 million and its average dollar value of assets under management as $523.23 million. So the math looks like this:$4.6 (operating expenses)divided by $523.23 (assets under management))= 0.008.Move the decimal point two places to the right, and you end up with an expense ratio of 0.8%.

3. 0.8% sounds like a tiny number, but it's actually rather high in context. That ratio means the company is taking 0.8% of the fund's money every year, and the ratio stays the same whether investors in the fund make money or lose it. Expense ratios vary widely; the Vanguard 500 index, at 0.15%, is probably the lowest.

4. If your mutual fund's expense ratio is higher than 0.15%, consider whether it's worth what you're paying. The "expenses" referred to by the ratio can include all sorts of things, from fat paychecks for fund managers to marketing campaigns to draw more investors to the fund. If you think your returns are worth the price, then by all means, keep your money there; there are some good fund managers out there who deserve the money they're making. But if your returns are less than stellar, you might want to consider a fund with a lower expense ratio.