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Suppose there is a mutual fund with expense ratio exactly 1 percent. I am aware that this 1 percent is subtracted "over time". But is there a standard on exactly how and when it is subtracted?

For example, each day, one might subtract (1/365.25)=0.0027% of the current assets allocated to the fund.

Or, each week, one could subtract (7/365.25).

Or, one could calculate even finer than one day, in theory, and then set that into the NAV.

Or maybe even the methodology that I have written is not what they do at all! Is there a widely-used standard, and if so, what is it?

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It's the other way.

You seem to think they take n% out of the fund and then look for things to spend it on: hey, we've got $3,147,250 this year! let's throw a big party! (except during COVID :-)

What they actually do is pay, out of the (usually) small fraction of assets held in cash, various expenses as those occur -- legal and accounting fees, advertising and incentives to distributors, printing and mailing reports to the people who still get them on paper, computer hardware and software, etc., and a good chunk to the management company or advisor(s), see next -- and at the end of the year or half-year they add up how much they spent, divide by asset value, and report that as the expense ratio. If that computation looks like it's going to be higher than they want (to attract and keep investors), the manager or advisor frequently waives some of the fee(s) they would otherwise charge, to bring the reported ER down. Sometimes they even promise in the prospectus to do this, so investors can rely on it.

Thus the actual ER will never be 'exactly' 1% as you had it -- but since it's reported rounded to the nearest hundredth of a percent, it could well be 1.00% to the nearest .01%. And it will usually vary slightly from year to year -- but usually only slightly, unless the fund or the market (or both) change fairly dramatically.

NAV is computed daily, including among the assets a cash balance which is slightly less than it would be on a gross basis (plus purchases minus redemptions plus investment income) because some expenses occurred, but this will usually be dwarfed by other variations.

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  • I see, so does that mean that if expenses are high on one particular day (for example when salaries are paid), then the NAV will decrease significantly more on that day than on most other days due to expenses? May 25, 2020 at 16:39
  • (relative to where it would be based on the underlying assets) May 26, 2020 at 1:35
  • It might occasionally go down a few basis points due to clumped expenses, but nearly all days it will move at least tens and often hundreds of basis points due to changes in the asset values, thus it is very unlikely you can isolate the changes due to expenses. May 26, 2020 at 6:52
  • Can you give an example of a mutual fund prospectus that doesn't specify the expense ratio? May 26, 2020 at 15:50

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