What is Total Expense Ratio (TER) in Mutual Funds?

Total Expense Ratio (TER) represents the annual cost that a fund house incurs to manage and operate a certain mutual fund that you have invested in. About 5.43 crore Indians invested in mutual funds in 2025, and if you are one of them, you must learn about the TER, as small differences in it might impact your wealth creation.

Working Mechanism of the Total Expense Ratio

Whether you are a new investor or an experienced one, you must consider the total expense ratio of the fund you choose. Fund houses declare this in the form of a percentage and deduct it from your potential return, and here is a detailed breakdown:

• Fund houses impose an expense ratio in the form of administrative charges, fund management fees, auditing, record-keeping, fund distribution, marketing, etc.
• The TER associated with a certain fund is the percentage of the average Asset Under Management. Fund houses deduct the TER daily and then update the Net Asset Value (NAV) of a fund.
• Thus, a fund with a higher TER increases expenses and affects the potential fund return. For example, a fund with 18% annualised return and 2% TER means your possible net return is 16%.

How to Calculate the TER in Mutual Funds?

Suppose you come across a fund with a total expense of INR 5 lakh, and the average AUM is INR 50 crore. Here is how you calculate it:

• Now, you can calculate it by dividing the total expense by the average AUM and multiplying it by 100.
• Thus, the formula for calculating TER is (Total incurred fund expenses/ Average AUM)*100.
• Under this example, the TER is (INR 5,00,000/INR 50,00,00,000) = 0.10%. Fund houses deduct this from the NAV, ultimately impacting the potential return of the investor.

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Importance of the Total Expense Ratio in a Mutual Fund

After learning the total expense ratio meaning, note the following importance of the TER:

1. Estimation of Investment Costs

   Since actively managed funds are more research-intensive and involve frequent buying and selling, their expense ratios are usually higher than those of passive funds. The highest expense ratio for active funds is 2.25%, and for passive funds, it may reach up to 1.25%. Therefore, it provides clarity for investors to choose funds accordingly.

2. Helps Choose Between Direct vs Regular Funds

   Regular funds might incur a higher expense ratio as they involve an intermediary. As direct funds involve no such middlemen, the TER in mutual funds for them might be lower. Thus, as an investor, you can compare the expenses between the two and choose one informedly.

3. Impact of Compounding on Total Expense Ratio

   The impact of TER in mutual funds might be more visible or profound with a longer investment horizon, i.e. funds held for 3 years or more. Since compounding reinvests the return on your investment throughout the horizon, the lower the TER is, the higher the potential for an optimised return.

How TER Differs from the Gross Expense Ratio (GER)?

Depending on the terminology, here is how these two differ:

• As the name suggests, GER incurs costs such as brokerage charges, an 18% GST, and other indirect charges. While TER incurs administrative, distribution, management charges, etc.
• TER typically provides the actual charges that get deducted from the NAV, whereas GER includes charges that might not directly impact the daily NAV of the fund.
• GER might vary between fund houses depending on their policies. The Securities and Exchange Board of India (SEBI) regulates the TER implication.

What is a Good TER and its Impact on Fund Returns?

However, depending on the fund type, you can consider the following ranges as an affordable expense ratio:

• If you invest in an actively managed fund, a total expense ratio between 0.5% and 1% might be good for you.
• For passive funds, an expense ratio below 0.5% can be better for you.
• To understand its impact, suppose you invest INR 100000 at 13.22% in two different funds for 1 year. TER for one fund is 0.22% and another is 1%.
• The fund with a lower expense ratio might generate a return of INR 1,13,000 after 1 year. The one with a higher ratio might generate a return of INR 1,12,220.
• This shows a difference of INR 780 in just one year, and if you stay invested for long, the difference will be greater.

The Total Expense Ratio Limit Imposed by the SEBI

The SEBI decides the following TER in Mutual Funds for the actively managed ones:

For passively managed funds, the following is the SEBI-regulated TER:

Major Costs That Add Up to TER in Mutual Funds

A fund house determines its fund’s total expense ratio by considering the following costs:

• Management costs are one of the key components of building the expense ratio. Fund houses charge this to manage their staff, offices, etc., to manage your funds.
• Accounting fee is another added cost in the TER, and it is related to record keeping, generating reports, etc., as mandated by regulators.
• Fund houses impose a distribution fee if distributors are associated and brokerage charges. They also impose a 12B-1 charge for the equivalent amount spent on advertising the fund.

Conclusion

The total expense ratio is a charge that a fund house imposes in the form of a percentage to deduct expenses to manage your funds. These involve management, administrative, brokerage fees, and more and fund houses deduct them from the NAV.

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Frequently Asked Questions

1. What does 0.75 expense ratio mean?

A 0.75% ratio is considered good, especially for active funds. Suppose the potential return of your chosen fund is 15% and with a  0.75% ratio, your net return would be 14.25%

2. What happens if TER increases?

With an increasing TER, the potential net return will be lowered, as now the fund house will deduct more. Suppose a 0.75% TER increases to 1% for a fund with a 15% return, then your net return will be 14%.

3. Is a lower TER always better?

No, although a lower total expense ratio might reduce expenses, it does not guarantee a better performance. Therefore, you must analyse both the expense ratio and historical fund performance before investing.

4. Is 0.60 a high expense ratio?

For actively managed funds, a 0.60% ratio might be good. However, for passive funds, such a ratio is high.