Total expense ratio

The total expense ratio (TER) is a measure of the total cost of a fund to an investor. Total costs may include various fees (purchase, redemption, auditing) and other expenses. The TER, calculated by dividing the total annual cost by the fund's total assets averaged over that year, is denoted as a percentage. It will normally vary somewhat from year to year. Typically it consists of the annual management charge (AMC), the fee that the fund company charges annually to manage the fund (typically commission paid to fund managers), plus 'other' charges incurred with running the fund. These other charges can consist of share registration fees, fees payable to auditors, legal fees, and custodian fees. Not included in the total expense ratio are transaction costs as a result of trading of the fund's assets. Because the TER is inclusive of these other charges, it is a more accurate measure of the 'drag' on a fund's performance than just using the annual management charge alone. In their advertisements and even their fact sheets, fund companies tend to give more emphasis to the AMC, making it difficult for a private investor (in the UK at least) to see the total expense ratio of the fund they are investing in. In the United States, however, it is mandatory not only to show it but also to make it as clear and as concise as possible. Fund costs are very important: every dollar charged by a fund is a dollar that investors won't get, but costs can be offset to some extent – or even completely – by benefits. Fund managers can benefit investors in a range of ways. These include: investing in assets that smaller direct investors cannot access; paying lower brokerage costs for buying and selling; using a range of risk reducing...