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The total expense ratio (TER) is a measure of the
total cost In economics, total cost (TC) is the minimum dollar cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes ...
of a
fund Fund may refer to: * Funding is the act of providing resources, usually in form of money, or other values such as effort or time, for a project, a person, a business, or any other private or public institution ** The process of soliciting and gathe ...
to an
investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
. 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 In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
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 An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
, 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 Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
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 The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
at least) to see the total expense ratio of the fund they are investing in. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, 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 Dollar is the name of more than 20 currencies. They include the Australian dollar, Brunei dollar, Canadian dollar, Hong Kong dollar, Jamaican dollar, Liberian dollar, Namibian dollar, New Taiwan dollar, New Zealand dollar, Singapore dollar, ...
that
investors An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
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 An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
cannot access; * paying lower
brokerage A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...
costs for buying and selling; * using a range of risk reducing techniques, such as managing levels of hedging in
foreign exchange The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
exposure; and * taking advantage of managing a large pool of assets – often with regular inflows – to make ongoing adjustments to the fund efficiently and in ways that enhance returns, minimize losses, and/or reduce price volatility. Fund managers also save investors time and effort by: * providing summarized return and tax details and * looking after the day-to-day paperwork and decision making that can be associated with holding a large number of investments. Just as buying the cheapest car or house isn't always the best option; it could be a mistake just to invest in the lowest-cost fund. Some kinds of funds (e.g., cash funds) cost a lot less to run than others (e.g., diversified equity funds), but a good fund should do better – after fees – than any cash fund over the longer term. In general it seems that there is, at best, a positive correlation between the fees charged by a fund and the returns it provides to investors. Once an
investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
has decided on a mix of assets (asset allocation) that suits their situation, needs, and goals, they need to know whether to invest through (more expensive) actively managed funds, cheaper ETFs (exchange traded funds), or directly. When considering using a managed fund, they should research what the manager does to earn their fees and the returns they are likely to achieve after fees. Professional financial advisers who have a
fiduciary duty A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
towards their clients can help with determining the best
trade-off A trade-off (or tradeoff) is a situational decision that involves diminishing or losing one quality, quantity, or property of a set or design in return for gains in other aspects. In simple terms, a tradeoff is where one thing increases, and anot ...
between all of the different investment options available, looking at all of the characteristics, including the total expense ratio.


See also

*
Expense ratio The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising (12b-1), and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets ...


References

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External links


Corrigendum to Commission Recommendation 2004/384/EC of 27 April 2004 on some contents of the simplified prospectus as provided for in Schedule C of Annex I to Council Directive 85/611/EEC (Official Journal of the European Union L 144 of 30 April 2004)Compute a fund's total costs from the turn over ratio and the total expense ratio
Expense Financial ratios