Hello Readers!
Through one of our articles, Mutual Fund Investment Exemplified, we explained to you the concepts of mutual fund investments and the benefits related to it. There are many interesting terms related to Mutual funds investments, some of which were mentioned in the article.
There is a term popular as TER or Total Expense Ratio, in mutual fund investments. Actually, TER is a kind of costs, charged to investors by AMC (Asset Management Company), that manage their funds.
Today, through this blog, we are going to explain every detail related to TER, like what is TER, what are its components, how is it calculated and many more. Read this blog and get to know everything about TER or Total Expense Ratio.
What Is TER (Total Expense Ratio)?
TER or Total Expense Ratio, also known as Net Expense Ratio, is defined as a kind of operational costs on mutual funds, charged by the AMC (Asset Management Company), to the investors. These charges are applicable to both Regular Plan of Mutual funds and Direct plan of Mutual funds.
The fund managers, with the help of their co-members or you can say, a team of professionals, allocate and manage the investor's fund in the most suitable mutual fund scheme, as per investors needs and requirements, also they work on investors portfolio, to make it less risky and maximum return yielding funds.
TER is considered as the percentage of assets that is payable to the fund or asset manager (i.e. AMC). In TER, it is said, the smaller the assets, the higher the expense ratio, this is so because the fund has to meet its expenses from a smaller asset base. On the other hand, the larger the assets, the lower the expense ratio.
Components of TER (Total Expense Ratio)
TER is a kind of cost, charged for smooth management and running the mutual fund scheme. It is said that TER is charged to the investors on a daily basis, but generally, it is disclosed to the investors once every 6 months, by the AMC. There are three major components of TER listed below:
- Management Fees: Selection of the best suitable mutual fund scheme, as per investors' requirements and investment goals, requires a fund manager with a high level of education, fund management experience, and professionalism. The management fee charged to the investors, within TER, is a kind of repay to manager investment advisory and expertise. On average, this fee varies from 0.50% to 1% of the funds’ assets.
- Administrative Costs: These are a kind of fund running cost, that includes activities like keeping records, customer support, and service, information emails, communications. These kinds of fees vary considerably.
- 12-1b Distribution Fees: It is a kind of marketing or promotional fee collected by many mutual funds. It is generally between 0.25% and 0.75% (the maximum allowed) of a fund's net assets.
How Is TER Calculated?
TER or Total Expense Ratio is calculated, by dividing the total cost of a specific fund by the respective funds’ total assets, which gives a percentage amount, this amount represents the TER.
Its formula can be represented as:
TER = Total fund costs / Total fund assets.
Let’s understand its calculation through an example. Suppose a person invested Rs 10 Lakhs, and he was charged Rs 15,000 by the AMC, as administrative charges and other charges. His expense ratio would be:
Total Funds Assets= Rs 10,00,000
Total Funds costs (Administrative charges + other charges) = Rs 15,000
TER= Rs 15,000/ Rs 10,00,000
TER= 1.5% of your investment value.
Impacts of TER (Total Expense Ratio) on Mutual Fund Returns
Total Expense Ratio displays, how much the fund charges (in terms of percentage) annually to manage your investment portfolio.
Generally, it is said that if a person earns a return of 12% on their investment, and if the fund has 2% TER associated with it, then the investor would receive a return of 10% on their investment. The mutual fund’s NAVs are reported after netting off the fees and expenses and hence, it is necessary to know how much the fund is deducting or charging as expenses.
Limitations in TER (Total Expense Ratio) fixed by SEBI (Security Exchange Board of India)
SEBI is the regulating body of mutual funds in India. On 18 September 2018, SEBI brought about major modifications in the current framework of expense ratio in the mutual fund's domain.
SEBI reduced the upper limit of expense ratio for all open-ended equity-oriented funds. It has specified expense ratio slabs based on the asset under management (AUM) of the fund house. As per these regulations, the total expense ratio (TER) allowed is 2.5% for the first Rs.100 crore of average weekly total net assets, 2.25% for the next Rs.300 crore, 2% for the next Rs.300 crore and 1.75% for the rest of the AUM.
The limit for debt funds is 2.25%.
Implications of TER (Total Expense Ratio)
Professionals say, a lower TER means more profitability and a higher TER means lesser profitability. Apart from this, investors can use the Expense Ratio as a parameter, to differentiate between actively managed funds and passively managed funds.
Although it is said that a fund with low TER, yields more profit, but the selection of mutual fund scheme to invest, should not be based on only TER (total expense ratio), rather there are more other factors like its past performance, management service, and more that should be checked upon before, finalizing a fund to start your investment.
Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best mutual fund, for your investments as per your requirement.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
As of now, you are aware of the term TER (Total Expense Ratio), its specification in mutual funds and impacts on returns of investment, so plan your investment in mutual funds, and don’t forget to check the expense ratio associated with it.
Happy Investing!
(Mutual Fund investments are subject to market risk, kindly read all the scheme related documents carefully. Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).