During the last 20 years, the average expense ratio for equity long-term mutual funds has dropped significantly, a trend that continued last year. Why?

According to a new study by the Investment Company Institute, on an asset-weighted basis the average expense ratio for equity mutual funds has fallen 20 percent in the last two decades. In 2011, investors paid an average of 79 basis points in expenses for equity funds, down 4 basis points from 2010. The asset-weighted average expense ratio for bond funds fell 2 basis points, to 62 basis points in 2011.

One reason for the drop: The demand for index funds has continued to rise. Assets in index mutual funds grew from $170 billion in 1997 to $1.1 trillion by year-end 2011, ICI said.

Two other major factors fueling the lower costs were a decline in expense ratios of individual funds and a continuing shift by investors in actively managed and index funds toward lower-cost funds.

The ICI study, Trends in the Fees and Expenses of Mutual Funds, 2011, found that the average expense ratio paid by equity fund investors was 79 basis points, down 4 basis points from 2010. The asset-weighted average expense ratio for bond funds fell 2 basis points, to 62 basis points in 2011.

The drop in expense ratios over the last 20 years has not been a straight fall downward.  For example, although expenses ratios dropped in both 2011 and 2010, they rose in 2009. "This three-year pattern is not unexpected given recent stock market developments and the fact that fund expense ratios often vary inversely with fund assets, because fixed fund expenses are spread across a larger asset base," the report said. "In short, mimicking the stock market, assets of equity funds initially declined in 2009, but then recovered in 2010 and 2011."

The study also noted there has been a marked decline in load fees paid by mutual fund investors. While the maximum front-end load fee that shareholders might pay for investing in mutual funds has remained nearly constant since 1990, the front-end load fees that investors actually paid have declined from nearly 4 percent in 1990 to 1 percent in 2011. This in part reflects flows into 401(k) plans, which are often invested in funds that waive load fees on purchases made through these plans, ICI said.