How Is TER Calculated?

TER Background

The Total Expense Ratio, or "TER," is a number that measures the complete cost involved with the management of an investment fund. The TER typically applies to a mutual fund. Because mutual funds employ management fees, trading fees, and other miscellaneous expenses, there are many factors involved. Calculating the TER helps investors create a clearer picture of fund performance.

TER Formula

TER is based on a formula. This calculation takes the total cost of a fund, and divides it by the total assets available. The result is expressed as a percentage.

The TER formula is:

Total Expense Ratio = (Total Fund Cost) / (Total Fund Assets)

Clearly, both the Total Fund Cost and Total Funds Assets must be known before TER can be calculated. Both of these numbers are often available by reading reports issued by the mutual fund management. The more accurate these numbers, the more precise the TER percentage will be.

TER Use

The TER percentage, once calculated, is a key decision making tool for investors. Because all costs are taken out of the fund, the return on investment is directly impacted by TER.

As an example, consider a mutual fund that generates an 8% return per year. If it has a TER of 3%, yearly gain drops down to 5%. This is the actual return the investor should expect, not the higher un-adjusted amount.

At a glance, an investor can see how efficiently run a fund is, based on the TER. By comparing the return percentages of several competing funds, sound investment decisions can be made.

References

• TER Definition
• Total Expense Ratio Information
• Fund Expense Details