Expense Ratio

All funds typically charge a management fee and other operating expenses. This is the annual expense ratio , and it is an important component of the total cost of owning a mutual fund. The expense ratio can consist of any or all of the following elements:

• Management fees

• Distribution fees (also called 12b-1 fees)

• Other expenses

A particular fund might or might not charge a distribution fee, but virtually all funds charge a combination of management fees and other expenses. Sometimes the expense ratio is temporarily reduced or waived to attract investors, but in general all mutual fund investors should expect to pay the expense ratio annually.

Money market funds charge low expense ratios, averaging perhaps 0.5 percent of net assets. Bond funds charge more, for example, one percent of net assets.

Equity (i.e., stock) funds charge even more, ranging from roughly 0.6 percent of assets up to as much as two percent, and sometimes more. On average, domestic equity mutual funds charge about 1.4 percent of assets. Mutual funds specializing in foreign securities typically have higher expense ratios because the cost of doing business, such as analyzing securities, is higher. For actively managed foreign equity funds, the average annual expense ratio is approximately 1.8 percent. See Insights, p. 32