06 Aug Understanding mutual fund fees

 Q. What’s the difference between an expense ratio and a management fee with mutual funds?

A. When it comes to investment costs, we should all know what we’re paying for.

All mutual funds and exchange-traded funds (ETFs) charge their shareholders an expense ratio to cover the fund’s total annual operating expenses, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

The management fee is the cost of hiring the fund manager(s) and is generally included in the expense ratio. It is also usually the largest component of the expense ratio. McCarthy said.

“Expressed as a percentage of a fund’s average net assets, the expense ratio can include various operational costs such as administrative, compliance, distribution, management, marketing, shareholder services, record-keeping fees and other costs,” he said. “The details of what comprises a mutual fund’s expense ratio is disclosed in the fund’s prospectus.”

You should always check to see if a fund’s expense ratio is in line with others that invest in the same area of the market. But be sure to compare apples to apples. For example, funds that invest internationally usually have higher expense ratios than funds that invest solely in U.S. stocks. And index funds have a far smaller expense ratio than most actively-managed funds.

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This story was first posted in August 2015.