What is Total Expense Ratio in Mutual Fund?
When you invest in Mutual Funds, a fund manager takes care of your investment for you and charges a fee for the services rendered. There are also other expenses associated with mutual fund investments, including commissions, buying and selling securities in the fund, etc. The Asset Management Company (AMC) includes these charges under one cost – the Total Expense Ratio. Let us understand this concept in detail.
The Total Expense Ratio (TER) is the total cost of managing a Mutual Fund scheme. The AMC charges TER as a percentage of assets under management (AUM), which the AMC then recovers from investors. The fund's Net Asset Value (NAV) is calculated by deducting the expenses daily. The major costs under TER are:
The fund manager manages the fund on your behalf by allocating assets and taking strategic decisions to ensure optimal returns at minimal risks. The fund house compensates the fund manager by paying them management fees.
TER in Mutual Funds also includes administrative costs, including Mutual Fund registration fees, custodian charges, legal and audit fees, marketing costs, etc.
AMCs and brokerage houses need to pay for the operating costs of their many branches, including the costs associated with electricity, rent, telephones, salaries etc. These are recovered under operational costs.
TER is calculated as a percentage of the total costs of a mutual fund scheme to its total fund assets.
TER = (Total Expenses/Total Assets) x 100
For example, an AMC has INR 200Cr as AUM for an equity mutual fund scheme. The AMC pays administrative and management fees worth INR 2Cr and miscellaneous expenses of INR 50 Lakh.
Then, total expenses = 2,00,00,000 + 50,00,000 = INR 2,50,00,000
Therefore, the Total Expense Ratio = (2,50,00,000/200,00,00,000) x 100 = 1.25%
When you buy the equity fund scheme, the AMC will charge you 1.25% as the Expense Ratio. Assume you make a 12% profit on your investment. After deducting 1.25% TER, the net profit would be 10.75%.
The Securities and Exchange Board of India (SEBI) has issued limitations on the percentage of Expense Ratio an AMC can charge. The limits are as follows:
Fund of Funds
< INR 100 Cr
Next INR 300 Cr
Next INR 300 Cr
On Balance AUM
Additional Expenses over the base TER are as follows:
So, remember to check what is Total Expense Ratio of your chosen Mutual Fund scheme, as it can impact your returns. Remember to select an AMC or broker levying lower charges to increase your in-pocket profits.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.