Total Expense Ratio (TER)
Definition of Total Expense Ratio
Total expense ratio (TER) is the ratio between total fund costs and total fund assets. It provides information regarding total costs involved annually for investment funds. The costs include expenses like legal fees, management fees, and other operational expenses. Total Expense Ratio is also called as Expense Ratio.
Formula to ascertain Total expense ratio
The formula used to ascertain Total Expense Ratio or TER is as follows:
Total expense ratio = Total fund costs / Total fund assets
The Total Expense Ratio helps in measuring the fund’s assets which are sold or used to manage the expenses relating to the fund. The output is expressed as a percentage and is calculated on a yearly or annual basis. The total expense ratio is important for the investors as it helps them analyse if their investment in the mutual fund or any other fund of the company is worth it.
The expenses that are included in the calculation of Total Expense ratio are the operating expenses like audit fees, bank charges, VAT amount, interest charges, the management fees, and exit fees.
A high Total Expense Ratio does not mean that the investment made in the company is a bad one. It should be taken as a negative only if the funds have higher expense incurred. A high Total Expense ratio is not always a good performance in the market either. It allows the investors to compare the cost to the companies.
The total expense ratio differs from one fund to another. While some funds have ratios that are lower or half a percent, there are other funds that have a higher percentage or two percent. A two percent Total Expense Ratio creates a greater impact on the performance of the fund in the market
It is therefore really important for an investor to know that Total Expense Ratio is important while considering not only making any investment related decisions but also for the investor to find out if they are investing in the right fund and what they can expect in the future from investing in these funds. The Total Expense Ratio is calculated by the CIS or the Collective Investment Scheme Industry to allow easy access to the investors who wan to make investments in several portfolios and it would provide them with a general idea if their investment would be worth it or not.