personal finance

As TER gets into the act, mutual fund expense ratios begin to fall


It has been over a month since India’s mutual funds industry switched to a new formula of Total Expense Ratio (TER) slab structure. Last year, market regulator Sebi amended the TER slab structure which reduced mutual funds’ fund management costs. Investors would have noticed this change in the factsheet of the fund houses from May. So, what exactly is TER and what role does it play while investing in a scheme? ET explains :

1. What is expense ratio?

Expense ratio is the fee a fund house charges an investor as the total percentage of fund assets used for administrative, management and all other expenses.

2. How does it work?

After Sebi abolished entry load in mutual funds, the focus shifted to an expense ratio variable. Small fund houses fall in higher expense ratio slab while big fund houses would have to levy relatively lower expense ratio. For instance, fund house which has assets under management (AUM) of ₹500-750 crore can charge TER of 2% while a fund house with an AUM of ₹50,000 crore, it will charge TER of 1.05%. The idea behind this new TER slab structure is to bring about a level-playing field in the industry. After this amendment, expense ratio on regular schemes (sold with the assistance of a distributor) would come down to 2%-2.5% from 2%- 3% and for direct schemes, it would remain in the range of 1%-1.15%.

3. When does expense ratio really matter?

Experts point out that one should look at expense ratio for debt funds in particular. A key reason is that the returns on debt funds are predictable given their very structure. This would help investors gauge where they stand in terms of returns. In the case of equity funds, there is an assumption that performance of companies and volatility in markets would generate high returns to make up for the fees the fund house charges under the garb of expense ratio.

4. Is TER an important parameter while investing in a scheme?

Although the total expense ratio is a key variable while investing in a scheme, it should not be the sole criterion while making an investment decision. A wise approach would be to look at the performance of a scheme over a long period of time. This performance must be compared with the scheme’s peers and its benchmark index. If a scheme performs well on these criteria then the expense ratio need not be given undue importance.





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