A bit of good news for investors: average expense ratios for equity, bond and hybrid mutual funds declined in 2011, according to a report released today from the Investment Company Institute. Fund investors paid an average of 79 basis points for equity mutual funds and 62 basis points for bond funds, down 4 points and 2 points, respectively, from 2010.

ICI partly attributed the decrease in mutual fund expense ratios to industry competition and investors’ continuing shift into lower-cost funds. In particular, investors are gravitating toward index funds, whose expense ratios are generally lower than those of actively managed funds.

The ebb and flow of the stock market also influenced the decrease in mutual fund expense ratios, according to ICI. The decline in expense ratios of equity funds in 2011 follows a drop in 2010 and an increase in 2009, a pattern that is consistent with the ups and downs of the market over the last three years. Expense ratios vary inversely with the fortunes (or misfortunes) of the market. As the stock market rises, expense ratios fall because fixed fund expenses are spread across a larger asset base, ICI explained in a statement. Assets of equity funds initially declined in 2009 but then recovered in 2010 and 2011.

The same inverse relationship helps explain the decline in expense ratios for bond funds in 2011. Strong inflows into bond funds and strong returns boosted assets, which allowed fund expenses to be spread over more assets.

The report found that the average expense ratios have fallen for both actively managed and index funds over the past several years. From 1997 to 2011, the asset-weighted average expense ratios of actively managed equity funds and index equity funds fell 11 basis points and 13 basis points, respectively. Average expense ratios of actively managed and index bond funds also fell — 16 and 8 basis points, respectively — during the same time period, according to ICI.

Sales loads — the one-time fees that investors pay either at the time of purchase or when shares are redeemed — also fell. The front-end load fees that investors paid declined from nearly 4% in 1990 to 1% in 2011.

Money market mutual funds also saw a drop in average expense ratios, falling 3 basis points in 2011 after a sharp decline of 9 basis points in 2010.

ICI’s annual study of mutual fund fee trends uses asset-weighted averages to summarize the expenses that shareholders actually pay through mutual funds.

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