Decoding TER for your benefit!

There has been a heated debate on fund expenses in India lately, with SEBI also upping disclosures on this front. Here are answers to some oft-asked questions from investors. What types of costs should I expect to incur while investing in a mutual fund? A majority of investors in India buy their mutual funds from AMCs (asset-management companies) and not through the stock-exchange platform. So, when you buy any scheme from an AMC, you may incur two kinds of costs: an annual recurring charge, which is called the total expense ratio (TER), and an exit load. Some schemes charge you an exit load if you sell your units within a specified period. When you buy funds through the stock exchange (as you do with exchange-traded funds for example), you also incur brokerage charges on your purchase or sale value in addition to the scheme's TER. So should I reduce the TER from the NAV before comparing fund returns? No. The NAV returns of Indian mutual funds already factor in the impact of the costs. This is because the NAV of a scheme is calculated by deducting the TER from the value of the scheme's portfolio. What about the commission to my agent or distributor? That is included in your scheme's TER. Indian funds are not allowed to charge investors any separate load towards distributor commissions. The AMC is supposed to pay its distributors or agents from the annul TER itself. However, lately, SEBI has been encouraging distributors to register as full service advisors and to charge a fee to their investors for the advice rendered. If you use the services of such registered investment advisors, or RIAs, you may pay an added advisory fee, apart from the TER. Who pays the fund manager who manages my scheme? The investment management fee is also included in the TER of the fund. Can AMCs charge anything and everything under TER? No. SEB

This article was originally published on May 21, 2018.