What is an Expanse Ratio?
Definition: The expense ratio is the efficiency ratio which is used to calculate the management expenses. In other words, This ratio measures the percentage of the investors which use as a management fee by comparing the mutual fund management fee by the total assets of the investor in the fund.
This is costly to create and maintain the mutual funds. For this, a professional money manager requires which the money that it is investing according to goal or not and monitor the assets actively.
For the maintenance of the office, the fund must be required and the mail of that fund may be sent on monthly, quarterly or annual basis to investors.
For the tax return and for the issuance of the report of each investor tax professional required which are hired by the office.
If the size of the funds grow then to maintain it more labour requires. But among the new investor fee will be spread out also. For the calculation of the efficiency of the fund, managing investor use the expense ratio.
Now we give the formula that how to calculate the management expense ratio.
Expense ratio formula calculated by dividing the operating expenses by average value of fund assets that is
Expense Ratio = Operating Expenses/average value of funds assets
What is high Expense Ratio?
The formula of expenses ratio is used to find the managing efficiency of the funds. High expense ratio means that more expenses are incurred to manage assets. Whereas low ration means that the lower amount of expense incurred to manage the same amount of assets.
How important is the Expense Ratio?
There are 2 ways through which management can lower the expenses ratio. These are the increased revenue and decrease the expenses.
Lower ratio as compare to high ratio is better because across the industries there is no standard percentage.
Now we take the example os expense ratio to understand its calculation in a better way.
Let an investor invest $100,000 in the mutual funds from its total investment of $1,000,000. total expenses to operate the funds at end of the year is $40,000. Now expense ratio calculated as
Expense ratio= Operating expenses/average value of fund assets
The percentage of the total assets which require to run the funds is 4%.
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