TER, or Total Expense Ratio, is the charge levied by fund houses to investors for investing funds in financial assets such as equities, bonds, gold and other assets.
The market regulator Securities and Exchange Board of India (SEBI) asked mutual fund houses reduce their TER or Total Expense Ratio in an attempt to make mutual fund investors gain more from their investments.
TER is charged as a percentage of the total assets managed.
TERs vary across mutual fund categories:
- Equity-oriented funds can charge a TER of 2.5%
- Debt and index funds charge TER at 2.25% and 1.5%, respectively.
- For equity schemes, fund houses can charge 2.5% for the first ?100 crore, 2.25% for ?100 - ?400 crore; 2% on the next ?400 - ?700 crore and 1.75% on any sum above ?700 crore.
- For debt schemes, the limits are 25 basis points, or 0.25%, lower in each slabs.
- An additional 30 basis points, or 0.30%, can be charged by the mutual fund if 30% or more of their inflows are received from beyond the top 15 cities.
Additionally, funds can also charge for the service tax on their management fee. Hence, an equity fund with a corpus up to Rs. 100 crore may end up charging up to 3.3%.
What’s in the latest development for me?
When a fund house charges you the TER, it does so after removing the TER from the value of your scheme’s portfolio. Thus, the higher your TER, the less money you can receive as an investor.
You might think that 0.5% or 1% TER is not a big deal considering equity mutual funds generate double-digit returns, but that’s not true. Even a small increase in TER has a significant impact on the returns you take back home,
Let’s consider this with an example. Say A and B are two identical index funds tracking the Nifty50. A’s TER is 1%, while B’s TER is 0.5 per cent. Had you invested Rs. 1 lakh in each fund 15 years earlier, the first investment would now be worth Rs. 8.95 lakh, while the second one would amount to Rs. 10 lakh. Though both the funds own the same stocks, the 0.5% difference in the expense ratio lowered your kitty by over Rs. 1 lakh.