Total Expense Ratio (TER) Definition
Define TER In Simple Terms
The total expense ratio, or TER, is a measure of the overall cost of operating an investment fund relative to its asset portfolio.
Also called the net expense ratio or the after reimbursement expense ratio, TER is calculated by dividing a fund’s total costs by its total assets.
The costs included in TER are operating fees, such as management fees, trading fees, auditor fees, and other operating expenses.
The total assets in a fund can be derived from financial statements or may be disseminated to investors through a prospectus.
Why Is TER Important?
TER is important to investors because these costs are usually withheld from returns rather than paid directly, and so they reduce the income from the fund.
For example, if a fund generated a return of 8% but the TER was 3%, then the investor will only see a 5% return.
A factor that adds to the cost of running a fund is active management.
Actively managed funds involve more human oversight and generally undertake more transactions, adding to the operating cost.
Contrarily, automated funds often have significantly lower personnel costs.
An important note is that some costs, such as commission, stockbroker fees, and annual advisor fees, are often not included in the TER calculation.
Fees charged on the buying and selling of shares or investments within the portfolio are also not included.