To manage a certain investment fund, the fund management company incurs various costs, including the costs of employing fund managers and a research team, computer equipment, office rent and administrative costs. The total cost of running a fund is recovered from the investors of such funds.
The expense ratio is the ratio of the total costs of running a fund and the assets under management (AUM) of the investment fund. A fund’s expense ratio helps investors understand how much of their investments are being paid to the fund management company as fees.
The expense ratio of a fund is typically expressed in percentage terms.
The formula for calculating the expense ratio for a fund is as follows: Expense ratio= Total costs incurred in running the fund/ Assets under management(AUM) of the fund
