What is the cost ratio?
One important calculation used by the market to determine whether a business or fund works efficiently and profitable is the cost ratio. In the business environment, the cost ratio is a comparison of various expenditures for net sales. In the mutual fund, this is an annual calculation that shows what percentage of the fund's value to be used. In addition, several separate calculations for specific costs or groups of costs are generally performed. The management is used to determine whether a certain department or costs are effectively managed. For example, the company can calculate the cost of selling costs by distributing costs for sale by total sale. Other common comparisons are to sell costs and administrative costs.
The ratio of operating costs is also calculated annually for rental property. This is accepted by the distribution of operating costs by a gross rental income. Investors often look at this number to determine whether the property is managed efficiently.
Calculation used for mutual funds is the ratio of management costs (MER). Operating costs include fees paid for the fund administrator or advisor, legal fees, accounting, audit, administrative costs, additional administrative costs and 12b-1 fees. Fees 12b-1 are marketing costs that the fund incurred in market shares for investors. The costs are added together and then divided by the average fund of the funds. Expenditure is then deducted from the value of the fund to determine the return to the investor.
Average Mer for Mutual Fund is 1.5%. Actively managed funds that specialize in a specific market sector tend to have higher costs, while index funds that require a fewer attention of management have lower expenses. However, the calculation does not include all costs for the investor because it does not include any sales fees called the load or redemption fees. Funds loaded divisions charge afterPayments for advance, sometimes 2% of total investment dollars, in exchange for a lower reduction in the ratio of annual costs. Funds without loading do not charge the initial fee and shift complete annual expenses against the return.
Before investing in a mutual fund, the consumer should carefully examine the administrative costs of funds. Mer is published in the Prospectus of the Fund as well as in large newspapers and financial websites. If the fund has a cost ratio of 1.8%and shows an increase of 5%, the investor's return will only be 3.2%. It is important to note that the expenses are deducted from the value of the fund, whether the fund has issued a profit or a loss per year.
Examination of expenditure and earnings from various funds also important when deciding whether it is more convenient to pay the fee for the fund loaded or for the purchase of the fund without loading with a greater annual ratio of costs. The history of previous performance may be an indicator of how high the cost of driving in the future. Another factor to be considered is how long it has an investmentTor intend to keep your money in the fund. If the investment is expected to be short -lived, it is unlikely to get the start fee on the fund loaded. The opposite may be true for long -term investments.