Total expense ratio definition
Total expense ratio meaning
Total expense ratio (TER) shows the costs associated with running an investment fund such as fees, legal fees, trading fees, auditor expenses, and operational costs. The ratio is used by the investors when evaluating the performance of an investment fund in terms of its profitability or when compared to other investment funds.
What is total expense ratio?
This ratio can also be called an expense ratio or management expense ratio, and it is stated as a percentage calculated for a specific year. It is a particularly important ratio for investors because it shows the degree of decrease in their profits as a result of costs generated by the fund. Investors can identify the operational efficiency of a given fund in relation to other funds. When calculating TER, total costs and total assets are considered.
TER = Total fund costs / total fund assets
Based on the TER, investors can evaluate the efficiency of an investment fund, such as a mutual fund. They could decide whether it is worth investing in it or not. This ratio is important because the decision should not be based solely on the return generated by the fund without accounting for the costs. Otherwise, it can create a wrong picture of the fund's success.
Let's say that there are two funds. Fund A has generated a return of 15 per cent and has a TER of 11 per cent. Fund B has made a return of 12 per cent and has a TER of 5 per cent. Without considering the TER, it is obvious that an investor should invest in fund A, since it has made a higher return. But after accounting for TER, the actual returns are as follows:
Fund A actual return = 15% - 11% = 4%
Fund B actual return = 12% - 5% = 7%
After accounting for fund's costs and expenses, it turns out that fund B has a higher actual return. Investors in this fund can have higher gains. Consequently, investment funds with higher actual return (return after TER has been considered) are more attractive for investors.