A mutual fund is an investment in which investors invest their money to buy a diversified portfolio of stocks, bonds, or other securities. The question is in trends: What is TER in mutual funds? Everyone that is into MF or savvy investors should know about TER (Total Expense Ratio) affects the returns you get, and understanding it can help you choose better funds.
In this article, we will learn about what is base TER in mutual fund and TER meaning in mutual fund and how it plays a role in fund selection and what are the causes of change in Total Expense Ratio (TER) in mutual fund over the time.
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What Is TER in Mutual Fund – Full Guide
TER in mutual funds stands for Total Expense Ratio. TER is the annual fee that a mutual fund charges to manage and operate the fund. This includes various expenses like fund manager salaries, administrative costs, distribution commissions, etc. TER is expressed as a percentage of the fund’s assets under management (AUM), and is deducted from the fund’s NAV (Net Asset Value) daily or periodically.
What Does Base TER Mean?
Base TER in mutual funds refers to the core expenses charged by the Asset Management Company (AMC) to run the fund. It is the percentage of a fund’s total assets that goes toward operating costs, excluding distributor commissions and GST. In simple terms, base TER = Fund management fee + administrative expenses + registrar/custodian charges + audit/legal costs.
What’s not included in base TER?
- Distributor commissions
- GST on management fees
- Additional expenses allowed under SEBI rules
Components That Make Up TER
To understand TER full form in mutual fund and how it’s built, let’s break down its major components in detail:
1. Management Fees
Management fees such as salaries of fund managers, analysts, and the research team are covered under the Total Expense Ratio. Since in mutual funds, professional expertise is required to choose the right stocks, bonds, for SIP and lumpsum, these costs are essential. AMC funds are a bit higher due to being actively managed by the managers.
2. Administrative Expenses
Administrative expenses such as employee costs, audit charges, stationery, it systems, compliance, reporting and office related costs are covered under this. This ensure smooth day-to-day operations and regulatory compliance, which is vital in an industry closely monitored by SEBI (in India).
3. Distribution & Marketing Costs
This section is primarily relevant to standard plans. Asset Management Companies (AMCs) provide agents, brokers, or distributors with commissions as a reward for bringing investors into the fund. These commissions have the potential to significantly increase the Total Expense Ratio (TER). Additionally, marketing efforts, including advertisements, promotional events, and awareness campaigns, are part of this category. In contrast, direct plans, where investors go directly without using distributors, do not incur these expenses, resulting in a lower Total Expense Ratio (TER).
4. Custodian, Registrar & Transfer Agent Fees
Mutual funds manage significant amounts of money and securities, which is why they rely on custodians to securely hold the underlying assets. Registrars and Transfer Agents (RTAs), such as CAMS or KFintech, oversee essential tasks like maintaining records, processing investor transactions, managing dividend payouts, and handling various administrative functions. They charge fees for their services, and these expenses are reflected in the Total Expense Ratio (TER). Without these key players, the fund would struggle with transparency and the necessary infrastructure for effective investor servicing.
5. Other Operational Expenses
This encompasses a variety of smaller yet essential expenses: communication costs (such as emails, call centers, and investor helplines), legal and compliance fees, utilities, software systems, and mechanisms for addressing investor grievances. While each of these costs may appear minor on its own, together they significantly impact the fund’s overall expense ratio.
Regular Plan vs Direct Plan Total Expense Ratio (TER) Components
| Component | Regular Plan | Direct Plan |
| Management Fees | Included – pays for fund managers & research team | Included – same as regular plan |
| Administrative Expenses | Included – office, audit, compliance, IT, etc. | Included – no difference |
| Distribution & Marketing Costs | Higher – agents/distributors earn commissions; AMC spends on marketing & ads | Not included – no distributor commissions; investor invests directly |
| Custodian & RTA Fees | Included – fees to custodians, registrars & transfer agents like CAMS, KFintech | Included – same as regular plan |
| Other Operational Expenses | Included – communication, utilities, legal, grievance redressal | Included – same as regular plan |
| Overall TER (Typical Range) | Higher (1.5% – 2.5% for equity funds) | Lower (0.5% – 1.5% for equity funds) |
Example: Impact of Total Expense Ratio (TER) on Long-Term Returns
Let’s assume you invest ₹1,00,000 in a mutual fund for 10 years.
- Both the Regular Plan and Direct Plan generate the same gross annual return of 12%.
- However, the Regular Plan has a TER of 2%, while the Direct Plan has a TER of 1%.
Step 1: Net Returns After TER Regular Plan = 12% – 2% = 10% net annual return Direct Plan = 12% – 1% = 11% net annual return Step 2: Final Investment Value After 10 Years Regular Plan: ₹1,00,000 → ₹2,59,000 (approx.) Direct Plan: ₹1,00,000 → ₹2,84,000 (approx.) Step 3: Difference in Wealth Just a 1% lower TER helps you earn ₹25,000 extra in 10 years on the same investment. Over 20–25 years, this difference compounds into lakhs of rupees.
Total Expense Ratio (TER) vs Returns: Why It Matters
Even a slight difference in the Total Expense Ratio (TER) can greatly affect your investment returns, particularly over extended periods. For instance, if two funds achieve comparable gross returns but one has a TER that is 0.5% higher, that discrepancy can compound over the years, leading to a significantly lower final corpus.
How TER Changes & What Affects It
Several factors contribute to change in Total Expense Ratio (TER) in mutual fund over time:
- Assets Under Management (AUM): As a fund grows, fixed costs are spread over a larger base, often reducing TER.
- Regulatory Changes: SEBI or other regulators may change maximum allowable TER for certain categories.
- Plan Type: Regular plans with distributors cost more; direct plans often have lower TER.
- Fund Strategy: Actively managed funds generally incur more transactions (higher transaction/ trading costs) than passive/index funds.
- Market Conditions: Volatile markets could lead to more buying/selling, more administrative costs, etc.
How to Compare TER When Choosing Funds
Here are some practical tips:
- Always check the fund’s factsheet for both TER and base TER in mutual fund.
- Compare TERs among similar category funds (equity vs debt vs hybrid).
- Prefer funds with a stable or declining TER over time.
- Ensure you understand all charges included: sometimes distribution commissions and exit loads add hidden costs.
- Factor in how long you plan to stay invested — high TER hurts more over longer investment horizons.
Conclusion
Understanding the what is TER in mutual fund is essential for all investors, whether you're just starting out or you have years of experience. Familiarizing yourself with the TER meaning in mutual fund, its components, and the factors that can lead to change in TER in mutual fund will enable you to make wiser investment choices. At E-Insure First, we believe in empowering investors with knowledge so you can select funds that offer you the best net returns, not just attractive gross number.
Whether you’re investing in equity, hybrid, or debt schemes of well-known fund houses like Axis Mutual Fund, always compare the TER carefully. A lower TER means more of your money stays invested and compounds for your benefit. To know how you can login to Axis mutual funds, read this article too.
Frequently Asked Questions (FAQ's)
1. What is the full form of TER in mutual fund?
TER stands for Total Expense Ratio, the total annual cost percentage charged by a mutual fund for managing and operating the scheme.
2. How is base TER different from regular TER?
Base TER excludes additional costs like marketing/distribution commissions and includes only core operating and management costs.
3. What TER percentage is considered good?
A good TER depends on the fund type — for equity or actively managed funds 1-2% may be usual, while for index or passive funds, below 1% is considered efficient.
4. Does TER affect returns even if the fund performs well?
Yes. Even if gross returns are high, a high TER will reduce the net returns you receive. Over time, its compounding effect can be substantial.
5. Can TER increase over time?
Yes. TER can rise due to growth in operating costs, changes in regulation, shifts in fund strategy, or reduction in assets under management.
