What is the Total Expense Ratio (TER)?

The Total Expense Ratio (TER) is a financial metric that represents the total costs of managing an investment fund, expressed as a percentage of the fund’s assets under management (AUM). It includes management fees, administrative costs, and operational expenses, helping investors assess the cost-effectiveness of a fund.

TER is commonly used in mutual funds, exchange-traded funds (ETFs), and index funds, ensuring transparency in investment costs.

How to Calculate the Total Expense Ratio (TER)

TER=(Total Fund ExpensesAverage Fund Assets)×100TER = \left(\frac{\text{Total Fund Expenses}}{\text{Average Fund Assets}}\right) \times 100

Example Calculation

• Total Fund Expenses: £500,000
• Average Assets Under Management (AUM): £50,000,000

TER=(500,00050,000,000)×100=1%TER = \left(\frac{500,000}{50,000,000}\right) \times 100 = 1\%

A 1% TER means investors pay £10 annually for every £1,000 invested in the fund.

What Costs Are Included in TER?

TER includes:

✅ Fund Management Fees – Fees paid to the fund manager for managing investments.
✅ Administrative Costs – Custodian, legal, and regulatory fees.
✅ Operational Expenses – Trading costs, marketing, and reporting.
✅ Auditing & Compliance Fees – Costs for fund audits and regulatory compliance.

TER does NOT include:
❌ Performance Fees – Some funds charge extra based on returns.
❌ Transaction Costs – Costs related to buying and selling securities.
❌ Entry & Exit Fees – Charges for investing in or withdrawing from a fund.

Why is TER Important for Investors?

• Impact on Returns – Higher TER reduces net returns.
• Cost Comparison Tool – Helps investors choose cost-efficient funds.
• Long-Term Performance Factor – Small differences in TER compound over time.

TER vs. Ongoing Charges Figure (OCF)

Feature	Total Expense Ratio (TER)	Ongoing Charges Figure (OCF)
Scope	Includes all fund costs	Similar but excludes some costs
Used in	Mutual funds, ETFs	Mainly European funds
More Comprehensive?	Yes	No, as it may exclude some fees

FAQs

What is the Total Expense Ratio (TER)?

TER is the total annual cost of running an investment fund, expressed as a percentage of assets under management.

Why does TER matter?

A higher TER reduces investment returns, making cost comparison essential for fund selection.

What is a good TER for an ETF or mutual fund?

• Passive ETFs & Index Funds: 0.05%–0.50%
• Actively Managed Funds: 0.50%–2.00%

Does TER include trading fees?

No, transaction costs for buying and selling securities are usually excluded.

How does TER affect investment returns?

A higher TER reduces net returns, impacting long-term portfolio growth.

Do all funds charge TER?

Yes, but TER varies by fund type and management style (passive vs. active).

Is TER the same as OCF?

They are similar, but OCF excludes certain costs, while TER is more comprehensive.

How can investors reduce TER costs?

By choosing low-cost ETFs, index funds, or funds with lower management fees.

Where can I find a fund’s TER?

It is disclosed in the fund prospectus or key investor documents (KID/KIID).

Do higher-cost funds always perform better?

No, expensive funds don’t always outperform, making cost-efficient investing important.