{"id":3377,"date":"2019-08-15T01:41:21","date_gmt":"2019-08-15T01:41:21","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=3377"},"modified":"2019-08-15T01:43:29","modified_gmt":"2019-08-15T01:43:29","slug":"total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/","title":{"rendered":"Total Expense Ratio (TER) in equity mutual funds \u2013 calculation and impact"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_40 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" area-label=\"ez-toc-toggle-icon-1\"><label for=\"item-69d2e1a9b53df\" aria-label=\"Table of Content\"><span style=\"display: flex;align-items: center;width: 35px;height: 30px;justify-content: center;direction:ltr;\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/label><input  type=\"checkbox\" id=\"item-69d2e1a9b53df\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Total_Expense_Ratio_TER_Definition\" title=\"Total Expense Ratio (TER) Definition \">Total Expense Ratio (TER) Definition <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Calculation\" title=\"Calculation\u00a0 \">Calculation\u00a0 <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Total_Expense_Ratio_and_Investor_returns\" title=\"Total Expense Ratio and Investor returns\">Total Expense Ratio and Investor returns<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Total_Expense_Ratio_and_Net_Asset_Value\" title=\"Total Expense Ratio and Net Asset Value\">Total Expense Ratio and Net Asset Value<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Total_Expense_Ratio_of_a_Direct_Plan\" title=\"Total Expense Ratio of a Direct Plan\">Total Expense Ratio of a Direct Plan<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#SEBIs_new_TER_Structure_for_Equity_mutual_funds\" title=\"SEBI\u2019s new TER Structure for Equity mutual funds\">SEBI\u2019s new TER Structure for Equity mutual funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Certain_key_aspects_of_TER\" title=\"Certain key aspects of TER\">Certain key aspects of TER<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/#Further_Reading\" title=\"Further Reading\">Further Reading<\/a><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"Total_Expense_Ratio_TER_Definition\"><\/span><strong>Total Expense Ratio (TER) Definition <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Total Expense Ratio (TER) or Expense Ratio can be defined as an annual fee or charge that a mutual fund charges to the scheme and in turn, to its investors.<\/p>\n<p>It includes various charges like management fee, administrative cost, trading &amp; brokerage and other operating expenses, audit fee, legal fee, sales &amp; marketing expenses etc.<\/p>\n<p>It is expressed as a factor of the fund\u2019s net assets on a daily basis. (in percentage terms)<\/p>\n<p>&nbsp;<\/p>\n<blockquote><p><em>When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the manager who reap outsized profits, not the clients. <strong>Both large and small investors should stick with <a href=\"https:\/\/kuvera.in\/blog\/performance-recommended-portfolio-update\/\" target=\"_blank\" rel=\"noopener noreferrer\">low-cost index funds<\/a>.<\/strong><\/em><\/p>\n<p><em>: Warren Buffett, Chairman, Berkshire Hathaway, 2017 &#8211; Shareholder Letter<\/em><\/p>\n<p>&nbsp;<\/p><\/blockquote>\n<h4><\/h4>\n<h4><span class=\"ez-toc-section\" id=\"Calculation\"><\/span><strong>Calculation\u00a0 <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Total Expense Ratio = Total Fund Expenses\u00a0 \/\u00a0 Assets Under Management (AUM) of the Fund<\/p>\n<p>&nbsp;<\/p>\n<p><strong>For example <\/strong>&#8211; XYZ Equity Fund has total Assets under Management of INR 50 crores.<\/p>\n<p>Total expenses (administration, management fee etc) for managing the fund = INR 1 crore<\/p>\n<p>&nbsp;<\/p>\n<p>Total Expense Ratio = 1 Crore \/ 50 Crores<\/p>\n<p>Total Expense Ratio = 2 %<\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Total_Expense_Ratio_and_Investor_returns\"><\/span><strong>Total Expense Ratio and Investor returns<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>The <strong>actual<\/strong> return for an investor from a scheme is to be arrived at by deducting the TER from its total returns.<\/p>\n<p><strong>\u00a0\u00a0 <\/strong><\/p>\n<p><strong>For example<\/strong> &#8211; Mr X invested INR 5,00,000 last year in XYZ Equity Fund. The TER for the fund is 2%. Thus, out of INR 5,00,000 invested by Mr X, INR 10,000 will go towards expenses. ( This also means that only INR 4,90,000 was available for investment )<\/p>\n<p>&nbsp;<\/p>\n<p>If, during the year, the return for this fund was 12%, it means the actual return for Mr X was 10%.<\/p>\n<div class=\"qName\"><\/div>\n<div class=\"qText\">\n<blockquote>\n<div class=\"qQuote\"><em>Most institutional and individual investors will find the best way to own common stock is <strong>through an <a href=\"https:\/\/kuvera.in\/explore\/all\/others\/equity-index-funds\" target=\"_blank\" rel=\"noopener noreferrer\">index fund<\/a> that charges minimal fees.<\/strong> Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.<\/em><\/div>\n<div><\/div>\n<div class=\"qDate\"><em>: Warren Buffett, Chairman, Berkshire Hathaway, 1996 &#8211; Shareholder Letter<\/em><\/div>\n<\/blockquote>\n<\/div>\n<p><strong>\u00a0<\/strong><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Total_Expense_Ratio_and_Net_Asset_Value\"><\/span><strong>Total Expense Ratio and Net Asset Value<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>The Net Asset Value (NAV) of a scheme is calculated every day after deducting the total expenses incurred. Said differently the NAV of a fund already accounts for the expense ratio and is net of all fees and charges that the Mutual Fund companies charge.<\/p>\n<p>Thus, a higher TER would mean <strong>lower<\/strong> Net Asset Value and vice versa.<\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Total_Expense_Ratio_of_a_Direct_Plan\"><\/span><strong>Total Expense Ratio of a Direct Plan<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><a href=\"https:\/\/kuvera.in\/blog\/direct-plans-better\/\" target=\"_blank\" rel=\"noopener noreferrer\">Direct plans<\/a> have the lowest TER because there is no intermediary involved. Thus there is no distributor, advisor or agent fee which is otherwise payable in the case of regular mutual fund schemes.<\/p>\n<p>This can bring a <a href=\"https:\/\/kuvera.in\/blog\/direct-plans-nav-calculation\/\" target=\"_blank\" rel=\"noopener noreferrer\">substantial difference to the size<\/a> of the corpus that the investor can create over a longer time frame.<\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"SEBIs_new_TER_Structure_for_Equity_mutual_funds\"><\/span><strong>SEBI\u2019s new TER Structure for Equity mutual funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>In September 2018, Securities and Exchange Board of India (SEBI) introduced a new rationalized total expense ratio structure for mutual funds, which will help in maximizing returns for the investor. This new TER structure has been implemented from April 1, 2019.<\/p>\n<p><strong>TER for Equity mutual fund schemes (Effective from April 1, 2019):<\/strong><\/p>\n<table style=\"height: 381px;\" width=\"933\">\n<tbody>\n<tr>\n<td width=\"141\"><strong>AUM (INR Crores)<\/strong><\/td>\n<td width=\"353\"><strong>TER (%)<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"141\">0-500<\/td>\n<td width=\"353\">2.25<\/td>\n<\/tr>\n<tr>\n<td width=\"141\">500-750<\/td>\n<td width=\"353\">2<\/td>\n<\/tr>\n<tr>\n<td width=\"141\">750-2000<\/td>\n<td width=\"353\">1.75<\/td>\n<\/tr>\n<tr>\n<td width=\"141\">2000-5000<\/td>\n<td width=\"353\">1.6<\/td>\n<\/tr>\n<tr>\n<td width=\"141\">5000-10000<\/td>\n<td width=\"353\">1.5<\/td>\n<\/tr>\n<tr>\n<td width=\"141\">10000-50000<\/td>\n<td width=\"353\">TER reduces by 0.05% with every INR 5000 crore increase in AUM<\/td>\n<\/tr>\n<tr>\n<td width=\"141\">&gt; 50000<\/td>\n<td width=\"353\">1.05<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>\u00a0<\/strong><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Certain_key_aspects_of_TER\"><\/span><strong>Certain key aspects of TER<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<ul>\n<li>With the new SEBI guidelines, higher AUM would translate into lower costs and thus low TER. This means greater benefit to the investors. Higher AUM, however, is neither a parameter nor a reflection of the fund\u2019s performance. It is just the economies of scale benefit being passed on to the investors.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li>The direct scheme of a mutual fund will have lower TER as compared to its regular scheme<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li>An actively managed or aggressive fund will have a higher TER as compared to a passive fund<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li>A fund with a lower TER has a greater chance of beating its benchmark<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li>The amount that gets deducted as TER might be small for an investor on a monthly\/annual basis but can have a substantial impact over reasonably long time frame with compounding working its magic<strong>\u00a0<\/strong><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Although the TER needs to be looked at and considered while investing in a mutual fund, it should not be the only criteria for choosing the fund.<\/p>\n<p>Looking at the long term performance of the fund, comparing it with the benchmark index and also with the same category schemes would be a better approach to follow.<\/p>\n<p>So, invest regularly, but choose wisely.<\/p>\n<p>&nbsp;<\/p>\n<blockquote><p><em>Investors, of course, can, by their own behavior make stock ownership highly risky. And many do. Active trading, attempts to &#8220;time&#8221; market movements, inadequate diversification, <strong>the payment of high and unnecessary fees to managers and advisors<\/strong>, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy.<\/em><\/p>\n<p><em>: Warren Buffett, Chairman, Berkshire Hathaway, 2014 &#8211; Shareholder Letter<\/em><\/p><\/blockquote>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Further_Reading\"><\/span>Further Reading<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p id=\"search-results__title_1-0-4\" class=\"comp search-results__title mntl-text-block\"><a href=\"https:\/\/www.investopedia.com\/terms\/t\/ter.asp\" target=\"_blank\" rel=\"noopener noreferrer\">Total Expense Ratio<\/a><\/p>\n<p><a href=\"https:\/\/www.investopedia.com\/articles\/personal-finance\/092613\/pay-attention-your-funds-expense-ratio.asp\" target=\"_blank\" rel=\"noopener noreferrer\">Pay attention to your funds expense ratio<\/a><\/p>\n<p>&nbsp;<\/p>\n<p>Not investing yet? Finding it hard to make time to plan your investments? Sign up on\u00a0<a href=\"https:\/\/www.kuvera.in\/\">kuvera.in<\/a> today and experience goal planning and investing at your fingertips.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Total Expense Ratio (TER) Definition Total Expense Ratio (TER) or Expense Ratio can be defined as an annual fee or charge that a mutual fund charges to the scheme and in turn, to its investors. It includes various charges like management fee, administrative cost, trading &amp; brokerage and other operating expenses, audit fee, legal fee, [&#8230;]<\/p>\n<p><a class=\"btn btn-secondary understrap-read-more-link\" href=\"https:\/\/kuvera.in\/blog\/total-expense-ratio-ter-in-equity-mutual-funds-calculation-and-impact\/\">Read More&#8230;<\/a><\/p>\n","protected":false},"author":11,"featured_media":3387,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false},"categories":[99],"tags":[250,83,251,67],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Total Expense Ratio (TER) in equity mutual funds \u2013 calculation and impact - Kuvera<\/title>\n<meta name=\"description\" content=\"Total Expense Ratio (TER) or Expense Ratio is the annual fee that a mutual fund charges to investors. 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