Total expense ratio

The total expense ratio, or TER, is the complete yearly cost of running a mutual fund, including management and other charges, shown as a percentage of your money. It is taken out of the fund automatically, so it quietly lowers your returns every year.

What goes into it

The TER is the all-in figure. It bundles the fund manager’s fee, administration, registrar and custodian costs, marketing, and, in a regular plan, the distributor’s commission. Because it is a single percentage charged on the whole scheme, you never receive a bill; it is deducted before the daily NAV is struck, which is why the return you see is already net of it. In everyday use, “TER” and “expense ratio” mean the same thing.

Why the number matters

A fee that sounds small compounds against you every year, so over decades the gap between a cheap and an expensive fund can be large on an identical portfolio. Index funds usually carry the lowest TER, often a fraction of a percent, because no one is picking stocks; active funds charge more for the manager’s work. A direct plan always has a lower TER than the regular plan of the same scheme, because it leaves out the commission.

Who limits it

SEBI caps how high a fund’s TER can go, with the limit depending on the scheme’s size and type; larger funds must charge less. Check a scheme’s current TER in its factsheet before investing.