What is Total Expense Ratio (TER) in Mutual Funds? A Beginner’s Guide to Smarter Investing
When investing in mutual funds, most people only focus on returns. But smart investors know that returns minus costs is what actually grows wealth. One of the most important costs to understand is the Total Expense Ratio (TER) — a key metric that can silently eat into your earnings if ignored.
📌 What is Total Expense Ratio?
The Total Expense Ratio (TER) is the annual fee that a mutual fund charges its investors to manage the fund. It includes:
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Fund management fees
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Marketing and distribution expenses
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Administrative costs
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Custodian and audit charges
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Transaction and operational fees
All these costs are deducted from your invested capital and are expressed as a percentage of the fund’s Average Net Asset Value (NAV).
Formula:
In India, the Securities and Exchange Board of India (SEBI) regulates the upper limits of TER based on the size of the fund’s assets under management (AUM). Larger funds typically have lower TER limits.
👉 Read SEBI’s Mutual Fund Regulations
💡 Why TER Matters for Your Returns
A higher TER reduces your net returns. For instance, if a mutual fund gives a 12% gross return, but the TER is 2%, your actual return is just 10%.
| Fund | Gross Return | TER | Net Return |
|---|---|---|---|
| Fund A | 12% | 2.0% | 10.0% |
| Fund B | 11% | 1.0% | 10.0% |
As shown, even if a fund delivers slightly lower gross returns, it could offer the same or better net return due to a lower TER.
🧠 Things to Keep in Mind Before Investing
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✅ Always compare TER alongside fund performance, not in isolation.
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✅ Look for consistent returns with reasonable costs.
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✅ Choose low-TER index funds if you’re a passive investor.
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✅ Use online platforms to compare TER across funds:
➤ Morningstar India
➤ Groww
➤ Moneycontrol
⚖️ When is High TER Justified?
High TER isn’t always bad. Actively managed funds may charge more but also aim to outperform benchmarks. Evaluate:
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Fund Manager’s Track Record
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Consistency of Past Returns
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Risk-Adjusted Performance
📌 Remember: A well-performing fund with a slightly higher TER might be better than a poor-performing fund with a low TER.
🔍 TER Limits Set by SEBI
| AUM Slab (Assets Under Management) | Max TER Allowed |
|---|---|
| Up to ₹500 crore | 2.25% |
| ₹500–₹750 crore | 2.00% |
| ₹750–₹2,000 crore | 1.75% |
| ₹2,000–₹5,000 crore | 1.60% |
| Over ₹5,000 crore | 1.05% |
Source: SEBI Circular
✅ Final Thought
TER is one of the most important—but most ignored—metrics in mutual fund investing. Choose funds not just based on flashy returns, but on what you actually take home after costs. Always compare TER across similar funds, especially if you’re investing for the long term.
🔗 Bonus Read:
👉 Best Performing Low TER Mutual Funds in India (2025)