What is the TER in mutual funds and how to calculate it? MintGenie explains

According to the regulations set by the Securities and Exchange Board of India (SEBI) for mutual funds, asset management companies (AMCs) are permitted to charge certain expenses, known as the Total Expense Ratio (TER), for the management of a mutual fund scheme. 

The TER covers various expenses, including management fees, administrative fees, distribution fees, auditing fees, legal fees, and other operating expenses. It helps investors understand the overall cost they will bear when investing in a mutual fund.

The TER is calculated as a percentage of the fund's daily net assets and is expressed as an annualised figure. As the assets of open-ended funds change on a daily basis, the proportional TER is included in the scheme's net asset value (NAV) when it is published on each business day.

TER limits

In India, the expense ratio is currently fungible, meaning that there are no specific limits imposed on any particular type of expense as long as the overall expense ratio remains within the prescribed limit.

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Formula of calculating of TER 

Total Expense Ratio =  (Total expenses incurred/ Total fund assets ) x 100

The total expense ratio is calculated by dividing the total expenses by the total assets of a mutual fund. To calculate the total expense ratio, you need to know the total expenses incurred by the mutual fund. These expenses include administrative costs, audit costs, transaction costs, legal and accountancy fees, sales and marketing expenses, and any other operational expenses. 

You also need to know the market value of all the stocks and bonds that the mutual fund is invested in on a specific date. This is referred to as the total fund assets. 

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Why do fund houses change the TER of mutual funds?

Fund houses may change the total expense ratio of mutual funds periodically, usually on a monthly or quarterly basis. This adjustment is primarily driven by two factors: changes in the Assets Under Management (AUM) and the need to maintain competitiveness within the market.

According to the AMFI’s official website, total expense ratio directly affects the scheme's NAV. When the expense ratio is lower, the NAV tends to be higher. Therefore, TER is a crucial factor to consider when selecting a mutual fund scheme.