TER stands for Total Expense Ratio. The Total Expense Ratio (TER) in mutual funds measures the total costs associated with managing and operating a mutual fund. These costs, expressed as a percentage of the fund’s total assets, include management fees, administrative expenses, and other operational costs.
Contents:
- TER full form
- Components of TER
- How To Calculate Expense Ratio?
- SEBI limitations on TER
- What is the impact of TER in mutual funds?
- How do you avoid expense ratio in mutual funds?
- What Is Ter In Mutual Fund- Quick Summary
- TER In Mutual Fund – FAQs
TER Full Form
TER stands for Total Expense Ratio. In mutual funds, it represents the total costs incurred in managing and operating a mutual fund scheme, expressed as a percentage of the fund’s average assets under management (AUM). This ratio helps investors to understand the real costs associated with a mutual fund scheme and how they might impact their returns.
For instance, if a fund’s AUM is ₹100 crore and its expenses are ₹2 crore for a given year, the TER would be 2%.
Components of TER
The Total Expense Ratio in a mutual fund comprises several components:
- Management Fees: These are the fees paid to the fund managers for their services.
- Administrative Costs: These include costs related to fund administration, such as accounting, investor relations, legal, audit, etc.
- Operating Expenses: This encompasses costs related to fund operations, including custodian fees, registrar and transfer agent fees, etc.
- Other Expenses: This category includes all other expenses not captured above, like advertising and promotional expenses.
How To Calculate Expense Ratio?
The expense ratio, synonymous with the Total Expense Ratio, is calculated by dividing the total expenses incurred by the fund by its average assets under management (AUM).
For instance, if a mutual fund incurs expenses of ₹2 crore in a year and its average AUM during that year was ₹100 crore, the expense ratio would be (2/100) * 100 = 2%.
This means that for every ₹100 invested in the fund, ₹2 is used towards covering the fund’s expenses.
SEBI limitations on TER
The Securities and Exchange Board of India (SEBI) has mandated that the Total Expense Ratio (TER) for equity-oriented mutual funds should not exceed 2.25%. This limitation aims to protect investors by controlling the costs associated with managing funds.
Other limitations imposed by SEBI include the following:
- For debt mutual funds, the maximum TER is capped at 2%.
- For index funds, ETFs, and funds of funds, the TER is generally lower and is capped at 1%.
- The TER should include all costs associated with fund management, except brokerage and transaction costs, service tax on management fees, and guarantee commissions.
What is the impact of TER in mutual funds?
The Total Expense Ratio (TER) directly impacts the net returns of a mutual fund. The higher the TER, the lower the investor’s net returns, all other things being equal. For example, if a fund generates a 10% return and has a TER of 2%, the net return to the investor would be 8%.
How do you avoid expense ratio in mutual funds?
In mutual funds, expense ratios cannot be completely avoided, but their effects can be lessened. But there are some ways to minimize it:
- Consider Direct Plans: Direct plans of mutual funds typically have lower expense ratios than regular plans, as they eliminate commission to intermediaries. You can invest in mutual funds completely free of cost with Alice Blue.
- Choose Passive Funds: Index funds and ETFs typically have lower expense ratios than actively managed funds.
- Compare Expense Ratios: When choosing between similar funds, compare their expense ratios and opt for the one with the lower ratio.
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What Is Ter In Mutual Fund- Quick Summary
- The Total Expense Ratio (TER) in mutual funds encapsulates all the costs involved in running the fund, giving investors an idea of the charges they incur on their investments.
- Total Expense Ratio or TER signifies the full financial impact of investing in a mutual fund, giving a clear percentage measure of the operational and management costs associated with the fund.
- The TER encompasses diverse costs, including management fees, administrative overheads, and other operating costs, which help understand the true investment cost.
- Calculating the expense ratio involves dividing the fund’s total expenses by its average assets, allowing investors to see how much of their investment goes towards maintaining the fund.
- SEBI has set TER limits to protect investors, with equity-oriented mutual funds capped at 2.25% and other stringent limits for different types of funds.
- The TER directly affects the net returns of a mutual fund, with higher TER leading to lower returns for the investor, emphasizing its importance in mutual fund selection.
- Even though the expense ratio is unavoidable, it can have less effect on mutual funds if you choose passive funds, compare the expense ratios of similar funds, or look into direct plans.
- Invest in mutual funds with Alice Blue. Alice Blue is offering a user-friendly interface at no cost.
TER In Mutual Fund – FAQs
TER, or Total Expense Ratio, in a mutual fund, represents the total costs associated with managing and operating the fund, expressed as a percentage of the fund’s total assets.
The main difference between AMC and TER is that AMC, or Asset Management Company, is the company that manages a mutual fund, while TER, or Total Expense Ratio, is the cost of managing the fund expressed as a percentage of the fund’s total assets.
The TER and the Net Asset Value (NAV) are inversely related. The expenses, as captured by the TER, are deducted from the fund’s total assets before calculating the NAV.
An “acceptable” total expense ratio varies depending on the type of fund. For example, index funds and ETFs typically have lower TERs (around 0.1% to 0.5%), while actively managed funds may have TERs up to 2% or more.
One limitation of TER is that it doesn’t include transaction costs like brokerage fees. Also, a lower TER doesn’t necessarily guarantee better net returns, as it doesn’t consider the fund’s performance.
