Expense ratio

In stocks and mutual funds expense ratio refers to the total annual operating expenses being expressed as a percentage of the mutual average net assets for a given period. In simple words, it refers to a percentage of the total income consumed by the operating expenses of the fund. It is the price tag of the fund company.

The company takes back a particular percentage of your asset every year as its operating expenses. The operating expenses may include the management fees, distribution fees and other expenses. The expense ratio generally does not include brokerage charges, transaction charges and other costs that may also form part of the fund's total expenses.

High expense ratios can affect returns. Higher the expense ratio, lower the return on investment. Some mutual funds will have relatively small expense ratios. The expense ratio is one of the important yardsticks for selecting funds. This is because it sharply affects the return on investment.

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