Expense Ratio

Owning a mutual fund carries an ongoing price known as an expense ratio. The number is calculated by dividing the fund's operating expenses, including taxes and the fees charged by its managers, by the average annual net value of its investments. The resulting number can range anywhere from around 0.1% for the least expensive index funds to more than 2%. The number is important because, for example, a fund with 2.1% expense ratio must outperform a fund with a 0.1% ratio by a full 2 percentage points in order for investors in the two funds to come out even. Expense ratios can be found in each fund's prospectus.