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Expense Ratio

In evaluating mutual funds a primary consideration is the fund's expense ratio, which is an expression of a percentage of the fund's assets that are used for administrative purposes. Predictably, expense ratios will be higher on funds that are actively managed with an investment strategy that calls for buying and selling on a regular, if not daily, basis.

Typically the elements of the expense ratio will include compensation to the fund's management team, administrative necessities such as mailings and record keeping, and activities undertaken for the purpose of assisting or communicating with customers such as maintaining a telephone help line. The expense ratio may also include fees associated with advertising, marketing, and distribution that are typically lumped under the heading of 12B-1 fees.

In a typical mutual fund an investor can expect to see an expense ratio of approximately 1.5 percent. This is a constant expense and does not fluctuate with the performance of the fund.

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