Total Annual Fund Operating Expenses
What Are Total Annual Fund Operating Expenses?
Total annual fund operating expenses are a fund's costs, for example, management and transaction fees and 12b-1 fees, reported as a percentage of the fund's total assets. Total annual fund operating expenses are required to be uncovered to investors in a fund's prospectus. They are reported as a ratio known as the total expense ratio (TER), which addresses expenses as a percentage of total assets.
Understanding Total Annual Fund Operating Expenses
While breaking down a fund's annual fund operating expenses, investors will frequently see the accompanying categories: management fees, distribution or 12b-1 fees, and other transaction costs.
Fund operating expenses can be classified as one or the other gross or net. A fund's sales loads are excluded from its annual operating expenses, but rather they are reported in the prospectus and are an extra factor for consideration while examining a fund's fees and expenses.
Special Considerations
Gross versus Net
A fund can report a gross and net expense ratio in the event that it has contracted with elements for fee waivers and discounts. Fee waivers and discounts are regularly contracted for a specific time period. A gross expense ratio will show the total annual expenses of a fund with next to no waivers or discounts.
The net expense ratio will show the annual expenses with fee waivers and discounts. Waivers and discounts might possibly be extended. Nonetheless, an investor can hope to pay the gross expense ratio when discounts terminate.
Sales Loads
While buying and selling publicly traded funds through full-service brokerage firms, investors will regularly pay sales loads. The fund company determines the sales load schedules and framed in the fund's prospectus. Sales loads paid to intermediaries are excluded from a fund's total expenses.
Types of Total Annual Fund Operating Expenses
Management Fees
Management fees are much of the time the best portion of a fund's operating expenses. Management fees will be higher for actively managed funds. Management fees range from 0.20% to 2.00%.
Distribution Fees
Distribution fees are a substantial part of a fund's operating expenses. Distribution fees may likewise be known as 12b-1 fees. These fees are paid to third parties who partner with the fund for its distribution. Distribution fees might be paid to a third-party distributor who actively partners with the fund company to guarantee the distribution of a fund across various channels.
A few funds pay trailing distribution fees to intermediaries. Intermediary distribution fees are structured with a fund's sales commission schedule. Fund's requiring high sales loads for intermediary brokers commonly have lower 12b-1 fees and vice versa.
Highlights
- A fund's sales loads are excluded from its annual operating expenses.
- Total annual fund operating expenses are required to be unveiled to investors in a fund's prospectus.
- Key fund operating expense categories included management fees, 12b-1 (or distribution) fees, and different costs.
- Total annual fund operating expenses are a fund's costs — frequently reported as a fund's total assets.
