DEFINITION of 'Expense Limit'

An expense limit is a limit placed on the operating expenses incurred by a mutual fund. The expense limit is expressed as a percentage of the fund's average net assets and represents a cap to the fees a shareholder may be charged.

BREAKING DOWN 'Expense Limit'

Expense limits are often voluntarily placed on a fund by its manager. The addition of an expense limit can make a fund more attractive, as investors are fully aware of the maximum percentage they may be charged. With an expense limit, fees will never rise above the stated percentage; however, the fund may charge under the stated limit. Funds that use an expense limit are referred to as capped funds since the limit caps the fees that shareholders can be charged.

Fund companies provide details on capped expense levels in their prospectus documents. Typically, capped expense levels will be instituted for a specified period. To renew or revise a capped expense level, the fund must obtain approval from its board of directors. Fund companies may add, revise or revoke expense caps at their discretion, however documentation and disclosure must be provided. Capped funds and indices adhere to a maximum level of investment per constituent. This can provide for broader dispersion and keeps a single holding from overly influencing the performance of the fund. Expense cap changes will affect the annual return of a fund. Any increase in expense cap levels could lead to lower returns, while decreases would help to increase performance.

Example of Capped Funds

A number of capped funds and capped indices exist in the investing market. Standard & Poor's (S&P) manages many capped indices which can be used for passive investment benchmarks. Capped indices from S&P include the following:

  • S&P/TSX 60 Capped
  • S&P/TSX Capped Composite
  • S&P/TSX Capped Energy
  • S&P Russia BMI Capped
  • S&P Italy Large and Mid-Cap Capped
  • S&P All Africa Capped
  • DJCI Gas & Oil Capped Component
  • S&P GSCI Cap Component

Types of Mutual Fund Fees

Mutual fund managers can charge various fees. Broadly speaking, the fees fall into two broad categories: Transaction fees paid to enter the fund (also called loads) and ongoing annual fees you pay to stay invested in the fund. The U.S Securities and Exchange Commission does not generally limit the fees a mutual fund company can charge. One exception to this is a 2% redemption fee limit in most situations. The Financial Industry Regulatory Association limits sales loads to 8.5% and 12b-1 fees used to pay marketing and distribution expenses to 0.75%.

RELATED TERMS
  1. Large Cap - Big Cap

    Large cap refers to a company with a market capitalization value ...
  2. Globally Capped Contract

    A globally capped contract is a structured financial instrument ...
  3. Life Cap

    With an adjustable rate loan, a life cap represents the highest ...
  4. Cap

    A cap is an interest rate limit on a variable rate credit product. ...
  5. Locally-Capped Contract

    A locally-capped contract is a structured investment product ...
  6. Price-Cap Regulation

    A price-cap regulation is a form of economic regulation that ...
Related Articles
  1. Investing

    What Are Market Cap Mutual Funds?

    Mutual funds that target specific market capitalization levels offer unique benefits to investors and market timers. Learn which which mutual fund market cap suits you.
  2. Investing

    An Introduction To Small Cap Stocks

    Get an introduction to small cap stocks, and learn why when it comes to a company's size, bigger isn't always better for investors.
  3. Investing

    Market Capitalization Defined

    Find out the differences between mega-, large-, mid- and small-cap stocks and how each suits different investing styles.
  4. Investing

    How to Analyze Mid-Cap Stocks

    Mid-cap stocks often outperform both large caps and small caps with very little added risk.
  5. Trading

    Fund Costs and Expenses

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

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  7. Small Business

    Capitalization Rate

    Capitalization Rate is a financial term most commonly used in the real estate investment industry. It is often simply called the Cap Rate.
  8. Financial Advisor

    3 Mutual Funds That Are Closed to New Investors

    Discover why some mutual funds choose to close to new investors, and learn about some of the factors that go into deciding whether to close.
RELATED FAQS
  1. Is there such a thing as a nano cap or micro cap index?

    While there are indexes that track micro cap stocks, there are few indexes tracking nano caps. Although definitions vary, ... Read Answer >>
  2. What are typical trust fund management fees?

    Learn about trust fund management fees, such as the annual management fee, annual expense ratio, brokerage commissions, and ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. 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 ...
  4. Portfolio

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

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

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center