When you invest in a mutual fund, the company doesn’t just collect your money and put it in a portfolio. It also manages the scheme, processes transactions, maintains records and meet various regulatory requirements. All this involves a cost.
These costs are covered through the Total Expense Ratio, or TER. While investors do not pay TER separately, they ultimately bear the cost because it is deducted from the scheme’s assets before the Net Asset Value, or NAV, is calculated. As a result, the NAV and the return received by investors are lower than they would have been without these expenses.
Knowing what TER means and how it works can make it easier to compare the costs of similar mutual fund schemes and choose a suitable one.
What is Total Expense Ratio (TER)?
The TER full form is Total Expense Ratio, and it reflects the annual expenses of running and managing of a mutual fund scheme. These expenses may include investment management fees, record-keeping charges, custodian fees, audit and compliance costs, distribution-related expenses and other costs permitted under mutual fund regulations.
The TER is represented as an annual percentage of the scheme’s assets under management (AUM), providing investors with a clear indication of the costs associated with their investment.
Key Takeaways
- TER is the cost of running and managing a mutual fund scheme.
- Investors bear this cost through the scheme’s NAV.
- A higher TER can reduce the return left for investors.
- A lower TER does not automatically mean a better-performing fund.
- Compare TER only between similar types of mutual funds.
- TER is just one factor to check along with risk, strategy and track record.
Suppose a scheme has a TER of 1%. Broadly, this means that annual expenses equal to ₹1 are charged for every ₹100 of the scheme’s average net assets. The terms “expense ratio” and “mutual fund expense ratio” are also commonly used when referring to TER.
How does Total Expense Ratio in mutual funds work?
TER is built into the way a mutual fund scheme’s NAV is calculated. You do not have to make a separate payment, and the number of units in your folio is not reduced to recover the expense. Instead, the applicable costs are charged to the scheme before its NAV is declared. In other words, the NAV published by a mutual fund already reflects the expenses accounted for by the scheme.
The expense ratio can vary across schemes. It may depend on the type of fund, the size of its assets, the way its portfolio is managed and the type of plan an investor chooses. A scheme with a larger asset base may also be able to spread some of its operating costs across more assets. Even so, size alone does not determine how much a scheme will charge.
Direct plan vs regular plan expense ratio
When you invest in a mutual fund scheme, you can usually choose between a Direct Plan and a Regular Plan. A regular plan includes distributor commission, so its expense ratio is generally higher than that of a direct plan. However, the lower-cost option may not suit everyone. Some investors prefer managing investments independently, while others may value the support of a distributor.
Active vs passive fund expense ratio
Actively managed funds usually have a higher expense ratio because the fund manager and research team actively select, monitor and adjust the portfolio. Passive funds, such as index funds and ETFs, have a portfolio that replicates an index (such as the Nifty 50) and generally requires less active decision-making. Their expense ratios are therefore often lower.
Read Also: Fees and charges of investing in mutual funds in India
How to calculate Total Expense Ratio
The TER is calculated by dividing the fund’s total expenses by its total assets.
The TER formula is:
TER = Total expenses of the fund ÷ Total AUM of the fund × 100
Let’s see what each of these terms mean.
Total expenses of the scheme: This includes all costs borne by the mutual fund house, also known as an Asset Management Company (AMC). It includes the fund manager’s compensation, marketing and distribution expenditures, legal and audit fees, and other operational expenses.
Total AUM: Assets under management (AUM) is the total value of the market value of all assets in the scheme.
TER calculation example
Suppose a mutual fund scheme has average net assets of ₹600 crore and incurs eligible annual expenses of ₹6 crore.
TER = ₹6 crore ÷ ₹600 crore × 100
TER = 1%
Key components of TER
The major costs that contribute to TER include:
- Administrative, maintenance and operational costs: These may include record-keeping, customer support, communication, technology infrastructure and other administrative tasks required for the smooth functioning of the scheme.
- Management fee: This covers the costs incurred by the AMC for managing the scheme’s portfolio and making investment decisions.
- Distribution fee: This fee is paid to distributors or intermediaries who facilitate the sale of mutual fund schemes to investors. It generally applies to Regular Plans.
- Registrar and transfer agent expenses: These cover investor servicing activities such as processing transactions, maintaining records and handling account-related requests.
- Custodian fees: These are paid to custodians for safeguarding the securities and assets held by the mutual fund scheme.
- Trustee fees: These cover the costs associated with overseeing the functioning of the mutual fund and ensuring compliance with applicable regulations.
- Audit, legal and compliance expenses: These include costs related to audits, regulatory filings, legal requirements and compliance activities.
- Brokerage fee: This fee is paid to brokers who execute trades on behalf of the mutual fund scheme.
- Administrative, maintenance and operational costs: These may include record-keeping, customer support, communication, technology infrastructure and other administrative tasks required for the smooth functioning of the scheme.
SEBI limit on TER in mutual funds
A mutual fund cannot charge any expense it chooses. The Securities and Exchange Board of India, or SEBI, sets limits on the base expense ratio that may be charged to a scheme. These costs differ based on the fund type ( equity funds vs debt funds vs fund of funds) and management style (active vs passive) and the scheme’s AUM.
Apart from the base expense ratio, the AMC can charge brokerage costs, transaction costs incurred while executing trades and applicable statutory levies. These together make up the TER.
SEBI norms about the base expense ratio are as follows:
Open-ended schemes
| Scheme category | Maximum base expense ratio as a percentage of daily net assets |
| Index fund scheme or exchange-traded fund | 0.90% |
| Fund of Funds investing in liquid schemes, index fund schemes and exchange-traded funds, including the weighted average expense ratio levied by the underlying scheme(s) | 0.90% |
| Other Fund of Funds investing at least 65% of assets under management in equity-oriented schemes, including the weighted average expense ratio levied by the underlying scheme(s) | 2.10% |
| Fund of Funds not covered above, including the weighted average expense ratio levied by the underlying scheme(s) | 1.85% |
Open-ended schemes other than those specified above
| Assets under management slab | Base expense ratio limit for equity-oriented funds | Base expense ratio limit for schemes other than equity-oriented schemes |
| On the first ₹500 crore of daily net assets | 2.10% | 1.85% |
| On the next ₹250 crore of daily net assets | 1.90% | 1.65% |
| On the next ₹1,250 crore of daily net assets | 1.60% | 1.40% |
| On the next ₹3,000 crore of daily net assets | 1.50% | 1.25% |
| On the next ₹5,000 crore of daily net assets | 1.40% | 1.15% |
| On the next ₹40,000 crore of daily net assets | Expense ratio reduced by 0.05% for every increase of ₹5,000 crore of daily net assets, or part thereof | Expense ratio reduced by 0.05% for every increase of ₹5,000 crore of daily net assets, or part thereof |
| On the balance of assets | 0.95% | 0.70% |
These limits apply to most actively managed open-ended equity, debt and hybrid schemes.
Close-ended schemes
| Scheme category | Maximum base expense ratio as a percentage of daily net assets |
| Equity-oriented scheme(s) | 1.00% |
| Other than equity-oriented scheme(s) | 0.80% |
What is the impact of TER on mutual fund returns?
Consider two similar schemes that earn the same return before expenses. One has a TER of 0.75%, while the other has a TER of 1.50%. The scheme with the lower expense ratio would leave more of that return with its investors.
The difference may look small over one year. Over a longer period, however, recurring expenses can have a more visible effect because the amount lost to costs also misses out on potential compounding.
That does not mean the scheme with the lowest TER should automatically be selected. A lower-cost scheme may follow a different investment approach, hold a different portfolio or carry a different level of risk. TER becomes most relevant when the schemes being compared are otherwise reasonably similar.
Can you compare the TER of different mutual funds?
TER can help compare the costs of similar mutual fund schemes. For example, comparing two actively managed large cap funds or two index funds may be useful. However, comparing the TER of an actively managed equity fund with that of a debt fund or index fund may not give a meaningful picture because their investment styles and operating costs differ.
Even within the same category, TER should not be considered in isolation. The scheme’s investment strategy, portfolio, fund manager details, track record and consistency of performance are also important. A lower TER may not matter much if a fund consistently underperforms.
Limitations of the Total Expense Ratio in mutual funds
TER tells you what a scheme costs to run. What it cannot tell you is whether its portfolio, risk level or investment approach fits what you are looking for.
TER does not measure investment quality
A low expense ratio does not tell you whether the fund manager’s approach is consistent, whether the portfolio is concentrated or whether the scheme is taking more risk than its category peers.
TER does not predict returns
The expense ratio is a measure of cost, not future performance. A lower TER cannot protect a scheme from market declines or guarantee that it will outperform another scheme.
Expense ratios should be compared within similar categories
Comparing the TER of an actively managed small cap fund with that of a broad-market index fund may not tell you much. The two schemes can differ in their investment process, portfolio construction and operating requirements.
A comparison is more useful when the schemes belong to the same category and follow broadly similar approaches.
TER can change
The expense ratio displayed today may not remain unchanged throughout an investor’s holding period. It can move within the applicable regulatory limits, which makes the latest disclosure more useful than a historical number.
How to check the expense ratio of a mutual fund
The latest expense ratio of a mutual fund can usually be found through:
- The AMC’s website;
- AMFI’s TER disclosure page;
- The scheme’s latest factsheet;
- The Scheme Information Document or Key Information Memorandum;
- Notices or addenda published by the AMC.
Things to keep in mind about TER
When examining a fund’s TER, investors may consider the following:
- Lower TER does not automatically make a scheme more suitable: A scheme’s investment objective, track record, strategy, risk profile and performance consistency. A lower expense ratio may offer limited benefit if the scheme delivers weaker performance than a comparable scheme with a higher TER.
Past performance may or may not be sustained in future. - TER varies across fund categories: Different categories of mutual funds may have different expense structures due to differences in portfolio management and operational requirements.
- Direct plans generally have lower TERs than regular plans: This is because direct plans do not include distributor commissions.
- TER may change over time: Asset management companies may revise TER within SEBI’s prescribed limits and applicable regulations.
- Costs can influence long-term outcomes: Over longer investment periods, even relatively small differences in TER may affect the returns retained by investors.
Why does a mutual fund’s TER change?
A mutual fund scheme’s TER may change over time. One reason is a change in the scheme’s asset size, as the permitted base expense ratio is linked to daily net assets. Operating expenses, brokerage costs, transaction costs and statutory levies may also vary. Any change must remain within the limits and disclosure requirements set by SEBI.
Conclusion
The Total Expense Ratio gives investors a clearer view of what it costs to operate a mutual fund scheme. It is charged to the scheme, reflected in its NAV and can influence the return that remains with investors.
TER is particularly useful when comparing similar schemes or the Direct and Regular Plans of the same scheme. But cost is only one part of the picture. The scheme’s objective, portfolio, investment approach and risk also need attention. A low number may catch the eye; what matters is understanding what that number is being compared with.
FAQs
What is a good expense ratio for a mutual fund?
There is no single expense ratio that is suitable for every mutual fund. Compare TERs within the same fund category and consider the scheme’s portfolio, investment approach and risk along with its cost.
What is the relationship between the TER and NAV?
The TER represents the annual percentage of a mutual fund’s assets used to cover its operating expenses. These expenses are deducted from the fund’s assets daily before calculating the Net Asset Value (NAV). A higher TER leads to a lower NAV, impacting your investment returns.
How is the total expense ratio charged?
The TER is not charged directly to investors as a separate fee. Instead, it is reflected in the daily NAV calculation. The fund’s assets are reduced by the proportionate TER amount each day, effectively incorporating the expense into the fund’s performance.
Is TER deducted daily?
Yes, the total expense ratio is accrued and deducted from a mutual fund scheme’s assets on a daily basis, as permitted under applicable regulations. This cost is reflected in the scheme’s NAV. Investors do not see a separate charge. Over time, TER may affect the scheme’s overall return potential.
What if the expense ratio is high?
A higher expense ratio means a larger portion of a scheme’s assets is used toward permitted operating expenses. Over long periods, this may reduce return potential compared to a similar scheme with lower costs, all else being equal. Investors may consider expenses alongside risk, strategy, and portfolio characteristics.
Does TER include exit load?
TER and exit load are different. TER represents the recurring expenses of operating a scheme. An exit load may apply when units are redeemed within a specified period, depending on the scheme.
What is the purpose of TER?
TER shows how much a mutual fund scheme charges for managing and operating the fund. It helps investors understand the cost of investing and compare the expenses of similar schemes. Since TER is reflected in the NAV, it also affects the net return investors receive.
