Understanding Management Expense Ratio (MER): A Comprehensive Guide

The management expense ratio (MER) – also referred to simply as the expense ratio – is the fee that must be paid by shareholders of a mutual fund or exchange-traded fund (ETF)Exchange Traded Fund (ETF)An Exchange Traded Fund (ETF) is a popular investment vehicle where portfolios can be more flexible and diversified across a broad range of all the available asset classes. Learn about various types of ETFs by reading this guide.. The MER goes toward the total expenses used to run such funds. The fee is not transferred directly to the fund owner(s) but is allotted to the fund itself.

The management expense ratio is expressed as a percentage, reflecting the percentage of assets fee related to a fund’s investment portfolio.

Management Fees

The MER is also sometimes referred to as the management fee because the cost is largely created by the hiring and payment of the fund’s portfolio managerPortfolio ManagerPortfolio managers manage investment portfolios using a six-step portfolio management process. Learn exactly what does a portfolio manager do in this guide. Portfolio managers are professionals who manage investment portfolios, with the goal of achieving their clients’ investment objectives.. The management fee is intended to cover the various expenses of a team of individuals who oversee, support, and manage the fund. Such expenses may include legal fees, accounting services, and other administrative costsSG&ASG&A includes all non-production expenses incurred by a company in any given period. It includes expenses such as rent, advertising, marketing.

The total percentage of the MER may depend on factors such as the size and success of the fund. The fee typically falls somewhere between 0.5% and 2% of the invested assets. The figure is taken from the final total of each fund’s assets under management (AUM). Because the majority of the MER is devoted to costs associated with the portfolio manager, the MER can vary significantly, depending on the experience, skill, and expertise of the fund’s manager.

In some cases, an additional trailing commission becomes part of the MER. The trailing commission is a continuous payment that is typically made to the advisory or investment firm responsible for selling the fund.

How to Calculate the Management Expense Ratio

The MER is, as noted above, calculated as a percentage of the total assets under management within the fund, which is otherwise known as the portfolio value. The calculation for determining the MER is as follows:

The MER total is then multiplied by 100 in order to convert it from a decimal figure to a percentage figure.

Example of the Management Expense Ratio

To better understand how MER is calculated, let’s take a look at an example.

For this example, the XYZ Mutual Fund manages a portfolio that is valued at $12,000,000 and with $175,000 in management costs and expenses. The MER would then be:

The management expense ratio is not a fee directly charged to investors. Rather, it is deducted from the fund’s net asset value (NAV)Net Asset ValueNet asset value (NAV) is defined as the value of a fund’s assets minus the value of its liabilities. The term "net asset value" is commonly used in relation to mutual funds and is used to determine the value of the assets held. According to the SEC, mutual funds and Unit Investment Trusts (UITs) are required to calculate their NAV. Investors are charged other fees associated with the fund – fees that are not part of the MER, and that are charged when an investor buys or sells their fund shares. The non-MER fees include items such as brokerage fees, exchange fees, and sales commissions.

Importance of the Management Expense Ratio

The MER is important because it significantly affects the return on investment generated by the fund. Take the example above: if Company XYZ Mutual Fund saw a return of 5% and then charged a 1.46% fee, then the actual net return for investors (minus any other non-MER fees) in the fund would be only 3.54%.

Over a period of time, the percentage reduction can result in a massive impact on the total dollar returns for investors. The lower the MER fee, the better off the fund’s investors are because the investment return generated is higher.

Key Takeaway

Understanding a fund’s MER is important. It shows the fund’s owners and investors how much is being spent on maintaining and managing the fund. It also reveals the percentage that will be deducted from the final percentage of earnings. The MER is vital information for any holder of shares in a fund portfolio, as well as for those who manage and sell the portfolio.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Dynamic Asset AllocationDynamic Asset AllocationDynamic asset allocation is an investment strategy that involves the frequent adjustment of the weights in a portfolio based on the overall market performance or the performance of certain securities.
• Internal Rate of Return (IRR)Internal Rate of Return (IRR)The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment.
• Retainer FeeRetainer FeeA retainer fee is an upfront cost paid by an individual for the services of an advisor, consultant, lawyer, freelancer, or other professional.
• Service ChargeService ChargeA service charge, also called a service fee, refers to a fee collected to pay for services that relate to a product or service that is being purchased.