Total Expense Ratio

Date Published: March 23, 2021

What is the total Expense ratio ?

The total expense ratio (TER) is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees, and other operational expenses. The total cost of the fund is divided by the fund’s total assets to arrive at a percentage amount, which represents the TER. TER is also known as the ‘net expense ratio’ or ‘after reimbursement expense ratio’.

What does the total  Expense Ratio tell you ?

The size of the total expense ratio (TER) is important to investors, as the costs are withdrawn from the fund, affecting investors’ returns. For example, if a fund generates a return of 7% for the year but has a TER of 4%, the 7% gain is greatly diminished to roughly 3%.The TER provides a way for the annual costs of running a particular fund to be covered. It takes all of the known costs associated with the fund’s operation and expresses them as a single number, generally as a percentage, drawing its basis from the assets associated with the fund. This does mean that the amount provided as the TER is dependent on the success of the particular fund. The funds supplied through the TER are used to support the management, trading and legal fees associated with the fund, as well as any audit costs or general operating expenses. A small percentage of the TER may be directed to other business operation costs. This can include expenses as simple as space rental and utilities for the business. Often, these expenses are referred to as overhead and include any financial obligation that is not necessarily directed to the actual production of a good or service.

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