Learn something new every day
More Info... by email
An expense limit is a type of ceiling amount that is placed on the operating expenses associated with some sort of mutual fund. The limit is typically determined by considering the average net assets that are held in the fund for a specific period of time, then setting aside a specific percentage of that amount to manage all the costs associated with the continued administration and management of that mutual fund. As part of the process, determining the expense limit also places a limitation on the amount of those costs that can be passed on to shareholders as charges for their participation in the fund.
Depending on how the mutual fund is configured, the terms and conditions that serve as the basis for the investment fund may specify a percentage of the fund’s average net assets that may go toward the upkeep and management functions. In other scenarios, the fund administrator is granted the authority to determine that percentage, usually with some guidelines that call for considering factors such as shifts in the economy, the growth that is experienced by the fund within a given time frame, or even the growth to the fund that comes about by adding more investors as participants. It is not unusual for governmental regulations that have to do with the administration and management of investment funds to also play a role in helping the fund manager determine the expense limit that will apply to an upcoming period.
One of the benefits of having an expense limit is that the measure effectively places a limitation or cap on the financial resources available to manage the oversight of the fund. This is helpful for the manager, in that it is easier to allocate portions of that limit for essential functions, as well as set a portion aside for unanticipated events that affect the fund in some manner. Investors also benefit from the expense limit, in that the potential for waste in the management process is kept within a certain range, minimizing the additional fees and charges that could be assessed on each of the shareholders in the fund.
Establishing an expense limit does not automatically mean that the percentage of resources set aside for fund management must be completely disbursed. This type of limit simply prevents spending more than the amount of the cap. It is not unusual for fund managers to still use various strategies to keep maintenance and upkeep expenditures as low as possible, resulting in lower fees for all the shareholders participating in the fund.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!