What is meant by Expense Ratio or Total Expense Ratio (TER)?
When you invest in a mutual fund, you’re investing in the fund’s assets and covering the costs associated with managing and running the fund. These costs are captured by the Total Expense Ratio (TER), along with potential loads charged when you invest or withdraw your money.
What Is Total Expense Ratio (TER)?
The Total Expense Ratio (TER) represents the percentage of the fund’s assets used to cover various expenses like management fees, legal costs, trading fees, and administrative expenses. For instance, if a mutual fund has ₹100 crores in assets and ₹80 lakhs in costs, the TER will be 0.8%. This means that for every ₹100 you invest, ₹0.80 is used to cover the fund’s costs.
A lower TER is generally more favourable for you, meaning fewer costs and more potential for better returns. Active funds, which require regular management, tend to have a higher TER compared to passive funds, which follow an index and have lower costs.
SEBI’s TER Limitations
The Securities and Exchange Board of India (SEBI) has set specific limits on the TER that mutual funds can charge, under Regulation 52 of the SEBI Mutual Fund Regulations, effective from April 1, 2020. These limits are based on the fund’s assets under management (AUM):
| AUM Slab | Equity Funds (TER) | Debt Funds (TER) |
| First ₹500 crores | 2.25%: This is the maximum Total Expense Ratio (TER) that can be charged for the first ₹500 crores of assets under management (AUM) in an equity fund. |
2.00%: For the first ₹500 crores of AUM in a debt fund, the maximum TER allowed is 2.00%. |
| Next ₹250 crores | 2.00%: After the first ₹500 crores, for the next ₹250 crores of AUM, the TER is capped at 2.00%. |
1.75%: For the next ₹250 crores in a debt fund, the TER is limited to 1.75%. |
| Next ₹1,250 crores | 1.75%: For assets between ₹750 crores and ₹2,500 crores, the TER reduces to 1.75%. |
1.50%: The TER is further reduced to 1.50% for debt funds with AUM between ₹500 crores and ₹1,750 crores. |
| Next ₹3,000 crores | 1.60%: The TER for assets between ₹2,500 crores and ₹5,500 crores in equity funds is 1.60%. |
1.35%: The TER is capped at 1.35% for debt funds with AUM in this range (₹1,750 crores to ₹4,750 crores). |
| Next ₹5,000 crores | 1.50%: As the fund’s AUM grows further, the TER for assets between ₹5,500 crores and ₹10,500 crores in equity funds is capped at 1.50%. |
1.25%: The TER for debt funds with AUM between ₹4,750 crores and ₹9,750 crores is 1.25%. |
| Above ₹50,000 crores | 1.05%: For equity funds with AUM exceeding ₹50,000 crores, then TER is capped at the lowest level of 1.05%. |
0.80%: Similarly, for debt funds with AUM above ₹50,000 crores, the TER can be as low as 0.80%. |
These limits also apply to scheme-related expenses, including inflows from retail investors from cities beyond the Top 30 cities, which are charged proportionately. Additionally, mutual funds can charge extra expenses under Regulation 52(6A), such as for exit loads.
What Expenses Are Included in TER?
The TER includes various costs, including:
- Management Fees: Paid to the fund manager for their expertise in handling the fund.
- Administrative Costs: These include legal services, marketing, and customer support.
- Transaction Costs: Fees for buying and selling securities.
- Other Operational Costs: For office-related expenses like rent and utilities.
Why Does TER Matter?
TER directly affects your investment returns. A higher TER means higher costs, which can reduce your overall profit. For example, if a fund generates a 7% return but has a TER of 4%, your effective return will be lower. When selecting a fund, always consider the TER as a key factor in your decision-making process to maximize your returns.
Types of Loads
In addition to the TER, mutual funds may charge loads during investment or withdrawal:
- Entry Load: This fee was charged when you first invested, but SEBI removed it in 2009.
- Transaction Charge: Since 2011, mutual funds charge a small fee based on how much you invest. First-time investors pay ₹150 for investments above ₹10,000, while existing investors pay ₹100 for similar amounts.
- Exit Load: A fee imposed if you withdraw your investment before a set period, usually between 0.25% and 3%. This encourages long-term investment.
Conclusion
Understanding the Total Expense Ratio (TER) and any additional charges like loads is crucial when investing in mutual funds. Lower TERs are generally more beneficial as they result in fewer costs and better long-term returns. Always compare different funds’ TER, performance, and management style before making an investment decision.
