Mutual Fund Net Expense Ratio

Finding Mutual Fund Net Expenses

A mutual fund publishes the fund's net expense ratio in the prospectus. The prospectus is a legally required document which explains to investors the fund's objectives, costs and risks. The majority of mutual funds will list the expense ratio on the fund's web page or provide a link to the summary prospectus, which will download as a PDF file. The expenses appear as a percentage of the mutual fund's total assets and is an annualized cost.

The mutual fund expense information may list both a gross expense ratio and net expenses. Gross expenses are the full cost of running and managing the mutual fund expressed as a percentage of fund assets. If the net expenses are lower than the gross expense level, the fund sponsor is absorbing some of the fund costs and the net expenses are the actual expenses being withdrawn from the fund assets. For example, in April 2011, the relatively new Prudential U.S. Real Estate Fund listed gross expenses as 2.32 percent for the class A shares and net expenses of 1.60 percent. Fund assets will be charged expenses at the lower net expense rate.

The Investment Company Institute annually publishes a Fact Book with detailed information on mutual fund expenses. Net expenses are published by fund type. In the 2010 Fact Book, the median expenses for stock funds was 1.44 percent. The range from the 10th to 90th percentile was 0.82 percent up to 2.28 percent. Bond mutual funds had median expenses of 0.96 percent with the majority of bond fund expenses falling between 0.52 and 1.73 percent.

The net expenses of a mutual fund directly reduce the annual return of the fund. If the fund portfolio increased in value by 12 percent during the year and the fund expenses are 1 percent, the return to fund investors would be 11 percent. For bond funds, the expenses reduce the dividend yield paid to investors. If two funds both earned 6 percent from their bond portfolios and one has expense of 1 percent and the other 0.50 percent, the second fund will have a dividend yield of 5.5 percent, one-half percent higher than the first fund.