Fund Expense Ratio

The expense ratio covers costs such as management fees paid to the fund manager, administration, legal and accounting costs and, in some cases, marketing and distribution fees. These costs are taken from the fund's assets gradually, so investors do not receive a separate bill; they simply receive a lower return.

For example, a fund with an expense ratio of 0.5% would cost an investor with 20,000 invested about 100 a year.

Small differences in fees add up over long periods. If 10,000 is invested for 30 years and grows at 6% a year after fees, it reaches about 57,400. If higher fees reduce the growth rate to 5% a year, it reaches only about 43,200. That one percentage point of fees costs more than 14,000.

Expense ratios vary widely. Index funds and exchange-traded funds tracking broad markets often charge less than 0.2% a year, while actively managed funds may charge 1% or more.

The expense ratio does not include all costs. Trading costs inside the fund, sales charges and platform fees may be extra. Many regulators require funds to disclose a total cost figure so investors can compare funds fairly.