Also known as the management expense ratio (MER), a mutual fund's expense ratio refers to the amount of money an investment firm requires to manage a fund's assets. The expense ratio is calculated by dividing a fund's operating expenses by the average dollar value of its assets.

For investors, a mutual fund's expense ratio is important. It provides information about how much a firm takes out of a fund's assets to pay for operating expenses. This is important because the higher a fund's expense ratio, the lower the returns for investors. Typically, the bulk of an expense ratio is the fee paid to the fund's investment manager. Other costs that usually are included in the calculation of the expense ratio include legal expenses, accounting fees, taxes, recordkeeping fees, custodial services, and accounting expenses. Some mutual funds also have an annual marketing cost called a 12b-1 fee, which is typically included in operating expenses.

Before deciding to purchase a mutual fund, it is a good idea to find about the expense ratio and other costs associated with it. To help you decide whether a specific mutual fund makes sense for your needs, the U.S. Securities and Exchange Commission provides a free mutual fund cost calculator on its Web site. The Financial Industry Regulatory Authority (FINRA) also provides an online mutual fund expense analyzer. The FINRA calculator allows you to compare the fees and expenses of up to three mutual funds or exchange-traded funds (ETFs).