Making an investment choice requires sound decision-making. This data is needed to compute the net-of-fees return of the fund and to assess the attractiveness of a mutual fund in the long-term. In this guide, you will learn how total expense ratio (TER) operates in real estate investments.
What Is the Total Expense Ratio (TER)?
Total expense ratio (TER) measure’s a mutual fund’s operating efficiency by estimating the operating cost relative to its assets. Some of these costs include management fees, legal fees, auditor’s fees and additional expenses.
TER is also known as the “net expense ratio” or “after reimbursement expense ratio.” It is commonly used by investors to determine if a fund is an appropriate investment option for them when they have considered all the fees. Therefore, TER is a parameter that investors use to determine how deducted fees from the funds after an investment scheme affects their returns.
How to Calculate Your Total Expense Ratio
Total expense ratio is calculated by comparing the total cost of an investment scheme during a period to the total fund asset, or total assets under management. It is usually expressed as a percentage of the asset of the fund.
Total Expense Ratio (TER) = (Total costs of the scheme during the period / Total Fund Assets)*100
NOTE: TER is usually expressed as an annualized percentage of the assets of the fund.
During the analysis of TER, it is crucial to give preference to funds with lower and/or decreasing TER, and to know how this decision impacts your investment and strategy. Generally, lower TER gives higher return potential. But, also take note of the fact that TER is influenced by industry and management style. Increasing year-on-year TER without improvements in performance may not be a good investment choice, so you may want to consult with your investment advisor.
How the TER Works and How to Use It
TER is important for investors to be able to understand how fund costs affect their return. If the TER is too large, it may eat a chunk of the return of the fund. While it is possible to assume TER may reflect the fund’s actual commitment to the fund’s performance.
But in reality, higher TER does not necessarily translate to a fund’s ability to create superior returns for investors. That is, higher TER does not guarantee greater performance for investors.
What’s the Difference Between Total Expense Ratio (TER) vs Gross Expense Ratio (GER)?
The gross expense ratio (GER) refers to the annual cost of operating a mutual fund. On a more specific basis, it refers to the total percentage of a fund’s assets that are devoted to running the fund. The total expense ratio (TER), on the other hand, measures the total costs associated with running the fund. Hence, trading costs and any reimbursements and waivers are part of the total expense ratio (TER).
Why Do Investors Use Total Expense Ratio (TER)?
Investors need to know a mutual fund’s total expense ratio to make sound investment decisions and to be able to understand how fund cost affects their return. Nonetheless, there are many other metrics you need to consider to make a sound investment decision.