Are Expense Ratios Tax Deductible?
Financial-market participants usually pay close attention to fees that portfolio managers charge, with a special emphasis on whether these charges are in line with managers' long-term performance. The next time you review your quarterly investment portfolio, keep a close eye on how much your mutual fund charges in operating expenses. This amount draws on expense ratio calculation.
Other People Are Reading
-
Definition
-
Expense ratios indicate amounts that investment managers charge to operate mutual funds or other financial vehicles, such as hedge funds or private equity funds. To calculate expense ratio, divide fund operating expenses by total assets. Consequently, expense ratios are not tax deductible because they are not expenses. Instead, these ratios are expense indicators or operating metrics usually expressed as a percentage. For example, if your mutual fund has total assets under management of $1 billion and operating expenses of $50 million, the fund's expense ratio is 5 percent ($50 million divided by $1 billion, multiplied by 100 percent).
Significance
-
Calculating expense ratios might be financially beneficial to you, especially if you have investments spread in many funds. By taking a thorough look at how much each fund manager charges, you can calculate your net investment income, that is, your investment gains minus how much portfolio managers charge for their services. You can then decide to consolidate all your accounts with one fund manager and sever ties with expensive, non-performing managers or make no changes and keep all accounts open.
-
Accounting
-
Investment professionals who oversee financial accounts on clients' behalf record their operating expenses in accordance with accounting norms. These include fund-industry practices, generally accepted accounting principles and international financial reporting standards. To record an operating charge, an investment accountant debits the "general and administrative expenses" account and credits the cash account. In accounting terminology, crediting cash, an asset account, means reducing the account's balance. This is distinct from the banking concept.
Financial Reporting
-
Expense ratio calculation has an impact on two financial statements: income statement and balance sheet. Operating expenses are income statement items, and cash is a balance sheet component. An income statement is also called a statement of profit and loss, or P&L. A balance sheet is otherwise known as a statement of financial position or statement of financial condition.
Regulatory Context
-
Government agencies set standards that fund managers must follow when overseeing investors' assets and charging operating expenses. These agencies include the U.S. Securities and Exchange Commission, Financial Industry Regulatory Authority and Commodities Futures Trading Commission. Other regulators include compliance branches of securities exchanges, such as the New York Stock Exchange, Chicago Mercantile Exchange and London Stock Exchange.
-
