The expense ratio of a mutual fund shows the percent of the fund's portfolio value that the management company takes to pay expenses for portfolio management and administration. Every fund publishes its expenses, which allows an investor to directly compare the fees of different funds. Fewer expenses result in a higher net return to investors.
The Investment Company Institute publishes an annual "Fact Book" that discusses the state of the mutual fund industry. In the chapter on fund fees and expenses, the universe of funds is divided into the two broad categories of stock and bond funds. Each of these fund categories is then separated into actively managed funds and index funds. The annual data is refined to find the average expense fees paid by investors. This average is significantly lower than the simple average of fund expense ratios. Large funds with low expenses attract more investment money than small funds with high expense ratios.
In 2011, the average asset weighted expenses for actively managed stock funds were 0.93 percent. For actively managed bond funds, the average expenses were 0.66 percent. On the index fund side of the business, the average expenses for index stock funds were 0.14 percent and index bond funds had 0.13 percent of expenses. For a comparison, the median expense ratio -- half the funds higher and half lower -- for equity funds was 1.35 percent, and the median expense fee for bond funds was 0.90 percent.
Besides the annual expense fees, some funds have a sale charge or load when fund shares are purchased. Mutual funds are starkly divided between no-load funds and the load funds sold by investment advisers. If a fund is sold with an upfront sales charge, the amount of the load as a percent of the investment decreases with larger investment amounts. In 2011, the average maximum load on equity funds was 5.4 percent. The average top load for bond funds was 3.9 percent.
Although the maximum sales charge to buy a load fund can be 4 to 5 percent, large investment amounts automatically qualify for a lower percentage fee. At $1 million, a load fund charges a zero percent load. According to the ICI "Fact Book," the average front end load paid in 2011 was just 1 percent for equity funds and 0.7 percent for bond funds.
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