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Total Expense Ratio (TER) in Mutual Funds: The Investor’s Guide

Post Date : July 17, 2025

Mutual funds offer investors an easy way to diversify, grow wealth, and access expert fund management—but it’s not free. Every mutual fund charges a fee known as the Total Expense Ratio (TER), which directly impacts your returns. As an investor, understanding TER is essential to make smarter, more cost-effective decisions when choosing mutual fund schemes.

This guide breaks down what TER means, how it is calculated, why it matters, and how SEBI regulates it in the Indian market.

What is Total Expense Ratio (TER)?

TER is the percentage of a mutual fund’s average assets that are used to cover the fund’s expenses—such as fund management fees, administrative costs, registrar and transfer agent fees, marketing/distribution charges, and audit/legal costs.

TER = (Total Expenses of the Fund / Average Assets under Management) × 100

A TER of 1.5% means that ₹1.50 is charged annually for every ₹100 you’ve invested in that fund.

What Does TER Include?

TER is a consolidated figure that includes:

• Fund Management Fee: Charged by the AMC (Asset Management Company) for managing the fund.
• Registrar & Transfer Agent Fee: Cost of investor servicing, processing transactions, etc.
• Trustee Fee & Custodian Charges: For managing and safeguarding the fund’s assets.
• Marketing/Distribution Expenses: Charges incurred for promoting the fund and paying commissions to distributors or platforms.
• Audit and Legal Fees: For fund compliance, auditing, and legal checks.

Types of TER: Direct Plan vs. Regular Plan

If you’re comfortable making decisions on your own or through platforms like RMoney, Direct Plans help you save on TER and earn better long-term returns.

SEBI Guidelines on TER

To protect investors from being overcharged, the Securities and Exchange Board of India (SEBI) has capped TERs based on the fund’s size:

Larger funds have lower TER caps because of economies of scale.

SEBI mandates AMCs to disclose TER daily on their websites and on AMFI’s portal.

Why TER Matters to Investors?

While TER may look like a small number, over time, it can significantly affect your net returns.

Example:

Let’s say two mutual funds both deliver a 10% gross return, but:

• Fund A has a TER of 2.0%
• Fund B has a TER of 1.0%

After deducting TER:

• Fund A gives you 8.0% net return
• Fund B gives you 9.0% net return

Over 10 years, this 1% difference compounds into thousands of rupees lost (or saved).

How to Check a Fund’s TER?

You can find a mutual fund’s TER:

• On the AMC’s official website
• On AMFI’s website (www.amfiindia.com)
• In the fund’s factsheet or offer document

Should You Always Choose the Lowest TER?

Not necessarily. While low TER helps improve returns, it should not be the only factor in choosing a fund. Consider:

• Fund manager’s track record
• Historical performance
• Portfolio quality and volatility
• Consistency in returns

Sometimes, a fund with a slightly higher TER may outperform a low-cost fund due to better fund management or asset selection.

TER in Passive vs. Active Funds

Passive investing is growing in popularity due to ultra-low TERs and index-beating returns over long durations.

RMoney Tip: How to Maximize Returns by Managing TER

1. Compare Direct vs. Regular plans before investing.
2. Use RMoney platforms to track and analyze your fund costs easily.
3. Consider passive funds if you want low-cost exposure to Nifty, Sensex, or global indices.
4. Periodically review TER changes, especially after a change in fund size or fund manager.

Conclusion

The Total Expense Ratio is one of the most underestimated factors impacting long-term mutual fund returns. A small percentage difference compounds into a large amount over the years. By understanding TER and incorporating it into your fund selection criteria, you can make better, more profitable investment decisions.

FAQs on Total Expense Ratio (TER)

1. How does TER impact my mutual fund returns?

TER is deducted from your fund’s returns before they are credited to you. For example, if a fund earns 10% gross returns annually and the TER is 2%, your net return will be around 8%. Over long periods, even a 1% difference in TER can significantly affect your total investment value due to compounding.

2. Why is the TER of direct plans lower than regular plans?

Direct plans do not involve intermediaries, distributors, or platform commissions. As a result, AMCs charge a lower TER. In regular plans, a portion of the TER goes toward distributor commissions and platform fees, making it costlier for investors.

3. Should I only choose the mutual fund with the lowest TER?

Not always. While a lower TER is better for returns, it should be considered along with fund performance, risk profile, fund manager track record, and consistency. A slightly higher TER fund may outperform over time if managed more effectively.

5. Is TER the same for all types of mutual funds?

No. TER varies based on:

• Fund type (equity, debt, hybrid, passive)
• Plan type (direct or regular)
• Fund size (AUM)—as per SEBI, larger funds must charge lower TERs
  Equity funds usually have higher TERs than debt or index funds due to active management costs.

Need Help?

Connect with RMoney’s investment experts and use our technology platforms to compare plans, evaluate TERs, and maximize your wealth-building journey.

Call us at 0562-4266600 / 0562-7188900, Email: askus@rmoneyindia.com

Disclaimer

This Blog is for educational purposes only and does not constitute investment advice. Always consult with a financial advisor before making trading decisions.