What is a 'Before Reimbursement Expense Ratio'

The before reimbursement expense ratio is the percentage of total assets a mutual fund must pay to cover operating expenses, measured before managers reimburse any of those fees.

Breaking Down 'Before Reimbursement Expense Ratio'

The before reimbursement expense ratio, or gross expense ratio, measures the annual operating expenses charged to investors in a mutual fund as a percentage of that fund’s assets. The calculation takes place before considering any potential reimbursements to investors from fund managers. The expense ratio calculated after deducting reimbursements is the after reimbursement expense ratio, or net expense ratio.

A mutual fund's operating expenses include management fees, transaction fees, 12B-1 fees and other business costs. Some of these expenses, such as most management fees, are calculated as percentages of net assets. As such, they don’t contribute to shifts in a mutual fund’s before reimbursement expense ratio year to year. Other fees, such as transaction fees, will not represent a predictable percentage of the fund’s total assets in a given year. Those fees produce the yearly shift in before reimbursement expense ratios. Because of those fees, the before reimbursement expense ratio tends ratio goes up in lean years, when returns are low but certain fees don’t decrease, and down in good years, when returns are high, and those same fees don’t increase.

Why Funds Reimburse Investors

If a mutual fund has committed to a capped expense ratio in its prospectus or simply elects to keep it competitively low, it will reimburse investors a portion of operation expenses to boost returns and at the same time produce a lower, after reimbursement expense ratio.

Why the Before Reimbursement Expense Ratio Is Important

The after reimbursement expense ratio is the one with an immediate impact on investors’ earnings, but the before reimbursement expense ratio also deserves attention. For one thing, most reimbursements are discretionary, meaning that just because managers elected to reimburse some of the mutual fund’s operating expenses this year, investors can't be certain they’ll do the same next year. Investors will need to keep an eye on the gross expense ratio to prepare themselves for that scenario.

Further, the before reimbursement expense ratio is a better measure of the actual viability of the company. If they are looking to invest in a mutual fund and they've narrowed it down to two that show similar returns and net expense ratios, comparing gross expense ratios can be an effective way to see which fund is truly healthy and which is on life support.

It’s worth bearing in mind that a nominally small difference between gross and net expense ratios can make a big difference in earnings. A 1.25% gross expense ratio may not look like much because it represents a percentage of total assets. On a mutual fund with a 5% annual return, it would consume 25% of the fund’s profits. Using reimbursements to reach a net expense ratio of .75% would keep an additional 10% of the annual return in shareholders' pockets.

RELATED TERMS
  1. Gross Expense Ratio - GER

    The gross expense ratio (GER) is the total percentage of a fund's ...
  2. Reimbursement

    Reimbursement is compensation paid by an organization for out-of-pocket ...
  3. Operating Ratio

    The operating ratio shows the efficiency of a company's management ...
  4. Health Reimbursement Account (HRA)

    A health reimbursement account (HRA) is an employer-funded plan ...
  5. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  6. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
Related Articles
  1. Financial Advisor

    Pay Attention To Your Fund’s Expense Ratio

    Despite trends indicating an overall decrease in fees across many fund categories, investors should still pay attention to expense ratios: even small differences in fees can have a significant ...
  2. Investing

    Is Your Low-Cost Index Fund Really Low Cost?

    Index funds and ETFs tend to have lower expense ratios than actively managed investments, but costs can vary widely among them. Investors should do their homework to understand how much they ...
  3. Investing

    Why Expense Ratios Are Important To Investors

    Expense ratios aren't just numbers in a column. They make a palpable impact on your bottom line. Find out how.
  4. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  5. Financial Advisor

    Mutual Funds: Don’t Overpay for Them

    Over the past several years, the average expense ratio that fund companies charge has dropped. For most investors, that means better returns.
  6. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  7. Investing

    Consider These Fees When Evaluating Mutual Funds

    The best way to evaluate a mutual fund is by digging a bit deeper into the fees charged.
  8. Investing

    Dollar-Cost Averaging With ETFs

    If you are investing small amounts regularly into an exchange-traded fund, be sure to do it right.
  9. Personal Finance

    10 Companies That Will Pay for Your MBA (BAC, WFC)

    Discover ten institutions of higher learning that are willing to help finance your MBA in exchange for your commitment to work for them.
RELATED FAQS
  1. Why is a mutual fund's expense ratio important to investors?

    Understand the nature of mutual fund expense ratios, and learn why it is critically important for investors to be aware of ... Read Answer >>
  2. Are Flexible Spending Account (FSA) items tax deductible?

    Learn how contributions from a Flexible Spending Account (FSA) are not subject to taxation; however, the expenses paid from ... Read Answer >>
  3. How ATM Fee Reimbursement Works (ALLY, EVER)

    Learn how ATM fee reimbursement works, identify some of the banks that offer it and understand the typical limitations that ... Read Answer >>
  4. What is the expense ratio in the insurance industry?

    Understand the two different methods of calculating expense ratio and find out how it can be used to compare insurance companies ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center