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In a mutual fund's prospectus, there is usually an annual "expense ratio", representing annual expenses of that fund as a percentage of the net asset. When/how does this get deducted? I'm curious how it works, and do they make sure there is no particular time of year when it is disadvantageous or advantageous to buy? (I'm guessing they do)

marked as duplicate by Dheer, Victor, littleadv, mhoran_psprep, John Bensin May 13 '14 at 10:27

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  • @BrenBarn Thanks, but it doesn't seem to explain when the fees get deducted? – user69715 May 13 '14 at 4:57
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When/how does this get deducted?

Most mutual funds will keep a percentage of the fund in cash equivalents that each day a portion is taken to cover the expenses of the fund. Thus, the expenses are being paid all the time from this portion. In the case of money market mutual funds, there is usually a drag on the yield that results from the expense ratio,i.e. the fund invests in commercial paper that pays 1.2% and the fund's expense ratio is .7% then you'll get .5% as the first offset is the expenses on the fund.

Are a Fund's Expenses Deducted Daily From Assets? notes in part:

Simply put, a fund's expense ratio is its daily operating costs, expressed as an annual percentage of its average net assets. While operating costs occur and are deducted daily, it's important to realize that the expense ratio represents a whole year's worth of these costs, not the amount deducted from the fund each day. In your case, the Oakmark Small Cap fund would deduct about $14.50 a year on a $1,000 investment.

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Whatever your fund's costs, the fees are deducted from your investment each day and have a direct impact on the fund's return.


I'm curious how it works, and do they make sure there is no particular time of year when it is disadvantageous or advantageous to buy?

Disadvantageous would be to buy right before a distribution. Don't Buy a Tax Bill with a Mutual Fund would be an article from Kiplinger's about how if you time your purchase incorrectly, you may end up paying taxes without seeing any gains right away.


Yes, the expense ratio is already priced into the Net Asset Value of the fund.

  • I see. So when a fund price increased, say 10% Y/Y, that already excludes the expense ratio? – user69715 May 31 '14 at 7:17

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