What does the expense ratio of a fund indicate?

The expense ratio of a fund is a critical measure that indicates the fee charged to cover the fund's operating expenses. This ratio represents the percentage of a fund's assets that are used to pay for management fees, administrative costs, and other operational expenses. Understanding the expense ratio is essential for investors, as it directly impacts their returns; a higher expense ratio can significantly eat into the returns generated by the fund over time. Thus, when evaluating a mutual fund or an exchange-traded fund (ETF), it is important for investors to consider this ratio to make informed decisions about potential investments and to compare costs across different funds.

The other options do not accurately reflect the function of the expense ratio; for instance, the total investment return pertains to the overall gains from the fund, while the risk level relates to the volatility and potential losses associated with the investment. Lastly, the duration of the investment period applies to the length of time one might hold an investment but is not connected to the operational costs captured by the expense ratio.