All you need to know about Total Expense Ratio (TER)
There are many Asset Management Companies (“AMCs”) that have schemes in which investors like you invest in. You invest your money in these schemes of Mutual Funds and wait for the power of compounding to work its magic. But how does the AMC take
care of the costs involved in managing that mutual fund scheme?The answer is - through the expense ratio.
The Total Expense Ratio is the annual % of the mutual fund scheme’s net assets. This cost is paid by the unitholders of the scheme, such as yourself. For example, if you invest Rs 10,000 in a mutual fund scheme which has an expense ratio of 2%,
then you end up paying Rs 200 to the AMC as expense ratio throughout the period of the year. But this amount of Rs 200 need not be paid by you to the AMC separately; in fact, the NAV of the scheme is always calculated after deducting the expense
What are the costs covered under the TER?
The expense ratio may cover the below costs-
- Fund Management fee
- Marketing and Distribution costs
- Legal and Audit costs
- R&T Fees
- Custody Fees
- Other Operating charges
The costs included may vary from one scheme to another, and so does the expense ratio.
TER= (Total costs of the fund/ Total assets of the fund) %
Securities and Exchange Board of India (SEBI) regulates the capping of the TER that any fund house can levy. TER is usually lower in case of passively managed funds, i.e. the funds wherein the fund manager is not required to track the market and
make changes to the portfolio constantly. The same is, thus, higher for an actively managed fund that requires more active participation from the fund manager.
Further TER for direct plan is lower than the regular plan to the extent of distribution commission charged in the regular plan.
Things to keep in mind about the TER
The TER is deducted every day from the total value of your investment on that particular day. That implies that if the annual expense ratio is 1%, then the daily deduction is 1%/365. This ensures that you pay the expense ratio only for the period
that you are invested in the scheme. Let us first see how the TER affects your investments. Suppose you invest an amount of Rs 1,00,000 in a scheme that has an expense ratio of 1%. As your investment value grows, here is how the TER is calculated
|Investment Value on a particular day
|Total TER paid on that day
|(1%/365) * 1,00,100
|(1%/365) * 1,00,500
And so on. The TER for every scheme is mentioned on the AMC’s website as well as the scheme’s factsheet.
Looking at the above example, it would be ideal if the expense ratio is as low as possible. But it is advisable to not base your buying decisions solely on the TER of a scheme. What may be more relevant is the scheme being in line with your investment
objectives and your risk appetite. For example, the TER of a scheme may be higher than its counterparts because the fund management fee,such as the marketing costs or legal costs, associated with the fund may be higher. Now, if this scheme
has a proven track record, can help you achieve your financial objectives, and aligns with your risk appetite, you may decide to invest in it. On the contrary, if a scheme has a relatively higher TER, that does not necessarily imply that the
fund management is sound in its case. There may be schemes with a lowerTER in the market that may have a better management and performance record. Hence, the decision is advised to be an all-rounded one, and not based on any one variable like
It should also be noted that the TER of a scheme may change even after you have made an investment. SEBI directs all AMCs to inform all investors beforehand if any scheme’s TER is being increased. The TER can help you make a buying decision in
a situation when you are faced with two identical/similar mutual fund schemes, and you need a differentiator to decide which one works for you.
In conclusion, the TER of a mutual fund scheme is better to be taken into consideration when selecting a scheme, but you may want to consult
your financial advisor before making a buying decision.
THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO
SERVE AS A PROFESSIONAL GUIDE FOR THE READERS.