Mutual funds and asset management companies (AMCs) in India are mandated by the Securities and Exchange Board of India (SEBI) to levy certain expenses known as the total expense ratio (TER) for managing mutual fund schemes.
The TER encompasses various costs such as management fees, administrative fees, distribution fees, auditing fees, legal fees, and other operational expenses. It provides investors with an understanding of the overall costs associated with investing in a mutual fund.
Typically, the TER is calculated as a percentage of the mutual fund’s daily net assets and is expressed on an annualized basis. Since the assets of open-ended funds fluctuate daily, the proportional TER is included in the scheme’s net asset value (NAV) when published on each business day.
TER Thresholds:
Presently, the TER in India is fungible, meaning no specific limits are imposed on any particular type of expense as long as the overall expense ratio stays within the prescribed limit.
TER Calculation Formula:
Total Expense Ratio = (Total expenses incurred / Total fund assets) x 100
The TER is derived by dividing the total expenses by the mutual fund’s total assets. To compute the TER, investors need to know the mutual fund’s total incurred expenses, including administrative, audit, transaction, legal, and accounting fees, as well as sales and marketing expenses, among other operational costs. Additionally, investors must be aware of the market value of all stocks and bonds held by the mutual fund on a specific date, referred to as the total fund assets.
Why Asset Management Companies Adjust TER:
Asset management companies (AMCs) frequently adjust the TER of mutual funds, typically on a monthly or quarterly basis. This adjustment is primarily driven by changes in Assets Under Management (AUM) and the necessity to maintain competitiveness in the market.
According to the Association of Mutual Funds in India (AMFI), TER directly impacts the scheme’s NAV. A lower expense ratio tends to result in a higher NAV. Hence, TER is a crucial factor for investors to consider when selecting a mutual fund scheme.
