TER to Make Equity Mutual Funds Cheaper: What is it?

Equity mutual funds are becoming cheaper on the back of the SEBI announcing a cap on the total expense ratio.

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With Equity mutual funds becoming cheaper from Monday, 1 April, the attention has now turned to the limits on the Total Expense Ratio (TER) that the Security and Exchange Board of India (SEBI) announced late last year that enabled the former.

So what is Total Expense Ratio? Well, in simple terms, TER is the cost charged by mutual fund companies to the investors for management of schemes. Fund management fees, agent commission, registrar fees, marketing and promotional expenses all come under the ambit of TER.

On the website of the Association of Mutual Funds of India (www.amfiindia.com), you can find the TER of all the fund houses for the mutual fund scheme.

TER is calculated in terms of the percentage of assets under management, with the formula being:

Total Expense Ration = Total fund costs/Total fund asset

To give an example, if an investor invests Rs 5,000 in a fund yearly. If the TER is 1 percent here, then he/she has to give Rs 50.

The TER Structure

For open-ended equity schemes, SEBI had recommended a TER of 2.25 percent for the first Rs 500 crore of assets. As the assets under management increase, the TER would reduce, meaning for the schemes of big fund houses, the TER would keep diminishing.

For Rs 500-700 crore of assets, the TER is 2 percent; for Rs 750-2,000 crore, it is 1.75 percent; for 2,000-5,000 crore it is 1.6 percent; and, for Rs 50,000 crore, the TER would 1.06 percent.

The reduction in the TER for funds with assets under management (AUM) of Rs 50,000 crore is expected to be as much as a negative of 0.42 percent, while for funds with AUM of 1,000 crore, there would be an increase of 0.01 percent, the ET report further pointed out.

(With inputs from The Economic Times and The Hindu Business Line.)