The Total Expense Ratio (TER) is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees, and other operational expenses. The total cost of the fund is divided by the fund’s total assets to arrive at a percentage amount, which represents the TER. The TER is also known as the net expense ratio or after reimbursement expense ratio.
The TER is a measure of a fund’s operational efficiency and is used by investors to compare the costs of different funds with similar investment objectives. Investors pay attention to the expense ratio to determine if a fund is an appropriate investment for them after fees are considered. The expense ratio is usually expressed as a percentage of the funds average net assets.
The expenses associated with operating a fund include management fees, brokerages and taxes in transacting the securities of the scheme, fees paid to trustees, registrar and transfer agents, custodians, personnel of the trustee and Asset Management Company, legal and accountancy fees, sales and marketing expenses, and any other operational expenses like rent, electricity, communication, etc. in proportion to the assets of the scheme.
The calculation used for determining TER is the following: Total expense ratio = (Total costs of the scheme during the period / Total Fund Assets)*100. The calculation describes, in mathematical terms, the costs of running the scheme with respect to the total assets under management.
In summary, the Total Expense Ratio (TER) is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. It is a key element in making an investment choice, as those funds which consistently show a high TER may not provide high returns, since high expenses tend to erode the returns generated.
