Mastering Mutual Fund Analysis: What is Total Expense Ratio (TER)?

Have you ever invested in stocks? If yes, then you might already have a Demat account for the same. If you’ve conducted equity transactions, you might also know that every buy/sell order you place attracts a brokerage. This is a type of service fee charged by your broker.As a result, it is essential to compare the brokerage of different brokers when opening your Demat account.Similarly, mutual fund scheme providers also charge an annual service fee known as Total Expense Ratio or TER. Just like you compare the brokerage, you should also check and compare the TER of the mutual fund scheme you’re interested in.Here is a detailed overview of what TER is and why it is so crucial while analyzing mutual fund schemes-

As mentioned above, TER is a type of annual service fee levied by mutual fund providers or asset management companies (AMCs). Every investor who invests in a mutual fund scheme of any AMC must pay this service fee.The service fee comprises all the different expenses borne by the AMC, like administrative cost, management fee, trading and brokerage, legal fee, marketing expenses, etc. The AMC recovers these expenses from the investors in the form of TER.The TER is expressed as a certain percentage of the total assets managed by the AMC. The NAV or Net Asset Value of any scheme is reported after deducting the TER. Also, the TER is proportionally debited from your invested amount daily. For instance, if the TER of a mutual fund scheme is 2.2%, it will be proportionally deducted from your portfolio every day.

The TER can vary between fund categories. It can also slightly vary between schemes from similar fund categories offered by different AMCs. The most significant reason why TER deserves the attention of every investor is that it directly impacts the returns generating capability of the mutual fund scheme . To give you a very simple example, if the yield of any particular scheme is 15% and its TER is 2%, the actual yield or the returns you will receive will be 13%. So, if the TER of a mutual fund scheme is lower, it could result in higher profitability.But do remember that the TER is not the only factor you should take into consideration while selecting a mutual fund scheme. There are others, such as investment objective, fund performance, AMC reputation, exit load, etc., that also deserve your attention.

The Securities Exchange Board of India (SEBI) has set limits on the Total Expense Ratio that an AMC can charge their investors. The AMCs must manage their expenses within the specified limits.On actively managed equity funds, the TER limit is up to 2.25% for the first Rs. 500 crores in daily net assets. On the next Rs. 250 crores to Rs. 50,000 crores, the TER limits range between 2% to 1.05%. The same for debt funds is 2% for the first Rs. 500 crores and then between 1.75% to 0.80% on net assets ranging between the next Rs. 250 crores to Rs. 50,000 crores.If an AMC is aiming to penetrate into smaller cities or B15 cities as specified by SEBI, there is an additional TER incentive of 0.30%

As the TER has a direct impact on the returns generated by a mutual fund scheme, every investor should clearly understand what it means before investing. Compare the TER of at least a few schemes from the fund category you’re interested in to make the right selection.Do focus on the other selection criteria as well so that you can select a mutual fund scheme that helps you get closer to your financial objective.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.