Why is expense ratio important in mutual fund investing? An explainer
If you are a new investor, you must understand the fundamentals of investing. Among several terms that you need to know, one of the key terms is Total Expense Ratio (TER). To run mutual fund schemes, fund houses are meant to incur a range of expenses, which include management fees, administration fee, transaction costs, marketing and other expenses.
When all these expenses are combined and expressed as a percentage of net asset value, it is known as TER. Per the current SEBI Regulations, fund houses are supposed to reveal the TER of all schemes on a regular basis on their portals as well as on AMFI's website. Let us learn about TER in greater detail. These are some of the frequently asked questions (FAQs) with regards to TER
TER comprises all expenses incurred to run a mutual fund scheme such as management fee, administration fee, marketing, transaction costs, audit fee, among others.
Total expense ratio is expressed as a percentage of net asset value. For example, when we say TER is 2 percent and the mutual fund's asset value is ₹ 20, then the TER would turn out to be 2 percent of 20 i.e., ₹ 4. The net asset value will be computed after deducting ₹ 4 to give ₹ 16.
It is a significant metric to know for the investors since a higher TER eats into profitability. In other words, higher TER leads to lower net asset value, and lower TER leads to higher net asset value (NAV). This means investors should check the TER of their schemes so that they take a calculated decision of investing in the schemes which have an optimum, if not low, TER.
The TER varies from scheme to scheme. It could be any percentage up to the maximum cap set by the Securities and Exchange Board of India (Sebi). While it could be as high as 2.25 per cent for equity schemes, it continues to fall with growing asset size.
For example, on the first ₹ 500 crore, TER is 2.25 percent, it is 2 percent on the next ₹ 250 crore, and so on, shows AMFI's website.
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