Mutual Fund Investing: Understanding Total Expense Ratio

What is the Total Expense Ratio?

The Total Expense Ratio (TER) is the fee you pay to a mutual fund for managing your investment. When you invest in a mutual fund, your money is pooled with other investors’ money and invested in various assets to earn returns. The TER covers the costs incurred by the fund to manage this money.

What does it include?

The TER includes various costs such as:

• Fund managers’ fees
• Marketing and distribution costs
• Administration charges
• Audit fees
• Brokerage fees

How is it deducted?

You don’t pay the TER directly. It is deducted daily from the fund’s net asset value (NAV) before the NAV is published on the fund’s website.

How is it calculated?

The TER is calculated by dividing the fund’s total expenses by the average value of its total assets under management (AUM) over a year. For example, if the average value of total assets in a year is Rs. 1,000 crore and the total expenses are Rs. 10 crore, the TER will be 1%.

Is there a cap on TER?

Yes, SEBI has set limits on TER based on the fund’s AUM and category. For example:

• For the first Rs. 500 crore AUM, the maximum TER is 2.25% for equity funds and 2% for debt funds.
• For the next Rs. 250 crore, it is 2% for equity funds and 1.75% for debt funds.

How does TER impact returns?

A higher TER means lower returns for you. For instance, if you invest Rs. 1 lakh in a fund with a TER of 1.5%, you will pay Rs. 1,500 a year, which will be deducted from your returns.

Is TER the only factor to consider?

No, while TER is important, it shouldn’t be the only factor you consider when selecting a fund. It doesn’t indicate a fund’s performance. Consider TER only when comparing similar funds.

Direct vs. Regular Plans

Direct plans have a lower TER compared to regular plans because you invest directly with the fund company without intermediaries, reducing costs.