What is Total Expense Ratio in Mutual Fund?

When it comes to mutual fund investments, maximising returns is a priority for any investor. But what about the additional costs associated with your investments?

The expense ratio is one such cost that beginner investors often fail to factor in when investing. Knowing this small but essential factor can go a long way in determining the overall returns you can generate from your investments.

What is the total expense ratio in a mutual fund?

The Total Expense Ratio (TER),is an annual fee charged to cover the amount spent on running the fund, managing the fund, and overseeing it. This expense is calculated as a percentage of the fund's total value and is charged daily prior to reaching the NAV. This implies that a bigger fund will have a lower TER than a small fund because the expenses are incurred on many assets as opposed to fewer costs incurred on a small fund.

What is the base expense total ratio?

The base expense ratio in mutual funds covers the necessary yearly running costs, such as management fees. It is the main expense of managing the fund. The base expense ratio includes the management fees and the administrative costs.

Total expense ratio

Total Expense Ratio (TER), is the total costs that are involved in managing a mutual fund. Some of the expenses included in the TER in mutual funds are as follows:

1. Cost of management

2. Costs of administration

3. Distribution Fee

4. Costs of maintenance

5. 12B-1 charge

6. Entry load

7. Exit load

8. Cost of brokerage

9. Additional Operating Expenses

The higher the asset base, the higher will be the ratio. A fund ratio between 0.5% to 0.75% is typically considered good.

How TER is calculated?

The total expense ratio (TER) of a mutual fund is computed as total annual expenses divided with the total assets under the management (AUM) of the fund for the same period.

For example:

The total assets is ₹200 crores

The administrative costs are ₹40 lakhs

The management fee is ₹50 lakhs

And the other costs: ₹30 lakhs

Step 1 you add all the costs:

-Total Expenses = ₹40 lakhs + ₹50 lakhs + ₹30 lakhs

-Total Expenses = ₹1.2 crores (or ₹1,20,00,000)

Step 2 you calculate the TER:

TER = Total Expenses / Total Assets

TER = ₹1.2 crores / ₹200 crores

TER = 0.6%

So, the TER is 0.6%. This means that every year, 0.6% of the fund’s total value goes toward covering its costs.

Conclusion

The total expense ratio should also not be overlooked when you are making your decisions about which mutual funds to invest in. It involves looking at the past record of the fund, and its consistency in delivering steady and healthy returns and so on. To get the most out of your invested money, it is advisable to go for a fund with a reasonable TER.