Total Expense Ratio

MoneyBestPal Team
A metric for the overall expenses related to running an investment fund, such as a mutual fund or an ETF.

The Total Expense Ratio (TER) is a metric for the overall expenses related to running an investment fund, such as a mutual fund or an ETF. These expenses consist of management fees, administrative fees, trading fees, legal fees, audit fees, and other operational costs. 

The average assets under management (AUM) of the fund for that year is used to compute the TER. The outcome is presented as a percentage.

For instance, a fund's TER is 1% if its AUM is $100 million and its total annual cost is $1 million. Thus, $1 of every $100 you put in the fund is used to cover operating costs.

The TER is significant since it lowers your returns and the fund's net asset value (NAV). For instance, a fund's net return is just 8% of its annual gross return is 10% but its TER is only 2%. The more TER you have, the more performance drag it causes.

Hence, when selecting a fund to invest in, as an investor, you should consider the TER. A lower TER indicates that more of your investment funds will be used to achieve your goals and less will be used to cover the fund's administrative costs. However, before choosing a fund, you need also take other aspects into account, like its strategy, risk profile, performance history, and reputation.

By examining their after-fee returns across various time periods, investors can compare funds with various TERs. This will help you determine the value that each fund adds to the market after its costs are subtracted. To calculate the amount that a fund's expense ratio (TER) may affect your returns over time, you can also use internet resources like expense ratio calculators.

Keep in mind that while the price is a crucial component of investment, it is not the only one. If a low-cost fund performs poorly or exposes you to too much risk, it might not always be preferable to a high-cost one. Similarly, a pricey fund might be worthwhile if it provides higher performance or other advantages that suit your needs and interests.

Finally, while choosing a fund that meets your financial goals, you should try to strike a balance between cost and value.