Financial Industry Regulatory Authority (FINRA) Practice Exam 2026 - Free FINRA Practice Questions and Study Guide

The expense ratio of a mutual fund includes the ongoing costs of managing the fund, which typically encompasses portfolio management fees, salaries, administrative fees, and 12b-1 fees. These costs are expressed as a percentage of the fund’s average net assets and are critical for investors to understand when assessing the overall cost of investing in a fund.

Front-end or back-end loads represent sales charges or commissions that are paid by an investor when purchasing or redeeming shares of a fund. These loads are not considered part of the ongoing operating expenses of the fund; instead, they are one-time fees associated with the transaction of buying or selling shares. As such, they are not included in the calculation of the expense ratio, which focuses solely on the recurring expenses necessary to operate the fund itself.

This distinction is important for investors, as funds with high expense ratios but low loads might be less costly over time than those with low expense ratios but high loads, depending on the investor's situation and investment horizon. Understanding the components of the expense ratio helps in making more informed investment decisions.