As an investor in mutual funds you should certainly be considering how much you are paying in expenses. If you have read this blog before you know that no one should be paying for any loaded funds, so we’ll assume you have a no-load mutual fund. The question then becomes, what is a reasonable expense ratio for mutual funds?

There is no single correct answer for a reasonable expense ratio for mutual funds, since funds in different parts of the market tend to have different expense ratios. The best way to gauge how expensive a mutual fund is can often be to compare it to its peers.

The good news is that over the past few years the average mutual fund expense ratio has actually dropped quite a bit. Last year the average expense ratio was just 1.19% as compared to 1.40% in 2003. The bad news is that many mutual funds are now speaking of the need to raise their expense ratios again.

There are a couple reasons for the drop in mutual fund fees in the last few years. The first one is that the overall stock market has suffered a great amount, which generally leads to lower fund expenses. The second is the increase in the amount of index funds, which are far cheaper than other funds that are actively managed.

I suggest investors use Morningstar to look at a particular mutual fund and compare it to all of its peers. There simply is no reason for any one fund to have expense ratios far higher than a similar fund. You do need to understand that funds such as international funds, emerging market funds, and small cap funds tend to have higher expense ratios. The lower expense ratios are typically found in index funds, large cap value funds, and passively managed funds.

Comparing mutual fund expenses is a great idea, just make sure you are comparing apples to apples and not apples to oranges!