Expense Ratio Calculation
The expense ratio represents the annual fees that a mutual fund or ETF charges its shareholders. This fee covers the fund's operational costs, such as management fees, administrative fees, and other expenses.
### Daily Deduction Process
1. **Annual Expense Ratio**: The expense ratio is expressed as an annual percentage of the fund's average net assets.
2. **Daily Rate**: To calculate the daily expense rate, the annual expense ratio is divided by the number of days in the year (usually 365).
3. **Daily Deduction**: Each day, the mutual fund calculates its total assets and applies the daily expense rate. This amount is then deducted from the fund's total assets.
4. **Impact on NAV**: This daily deduction reduces the Net Asset Value (NAV) of the fund, which is the price per share.
### Example
- Suppose a mutual fund has an annual expense ratio of 1%.
- The daily expense rate would be 1% / 365 ≈ 0.00274%.
- If the fund's total assets are $100 million, the daily expense would be $100 million * 0.00274% = $2,740.
- This $2,740 is deducted from the fund's assets, thus lowering the NAV slightly.
### Why It Matters
This daily deduction ensures that the expense ratio is continuously accounted for, providing a fair and consistent method for covering the fund's operating costs.
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