What is the expense ratio?

It's a term used in relation to fund management and describes the cost of running the fund in question. All costs such as salaries, taxes, marketing, administration, fees and other expenses are added up and expressed as a percentage of the average value of assets under management (AUM).

Where have you heard about the expense ratio?

As an investor, you may well have read about the expense ratio in the annual reports of asset-management companies in which you have invested. Financial media routinely scrutinise expense ratios for indications of fund-manager efficiency or the lack of it.

What you need to know about expense ratios.

Expense ratios tell you as an investor what it costs to run a particular investment fund. The fee paid to the fund manager's is the largest component of operating expenses. The other costs include: salaries, fees, taxes, legal and accountancy costs, marketing and administration; which can be met only from investors' funds.

The lower the expense ratio, the less investors' funds are being diminished. Actively managed funds will usually have considerably higher expense ratios than passive or index-tracker funds, given active funds need to employ skilled portfolio managers.

For example: The Fidelity Contrafund is one of the largest actively managed funds in the marketplace with an expense ratio of 0.71%.

Find out more about expense ratios.

Expense ratios are a key tool for judging investment managers. Find out more about investment management here.