What it means
Every fund has costs, such as the manager's fee, administration, custody (safekeeping of the assets), audit and legal bills. Rather than listing each cost, the fund adds them together and divides by its average assets to produce one percentage.
The fund does not send investors a bill. Instead the costs are taken out of the fund's assets continuously, which reduces the fund's price slightly each day, so investors often feel the cost only as a lower return.
A small percentage can matter a great deal over time. A difference of 0.5% a year sounds trivial, but it compounds (earns returns on past returns), so over twenty or thirty years it can remove a meaningful slice of the final pot.
TER is most useful for comparing similar funds. A passive index fund (one that simply copies a market index) typically has a lower TER than an actively managed fund, where a team picks investments and charges for that effort.
There are limits to what TER shows. Trading costs inside the fund, entry or exit charges, and platform fees may sit outside it, so the real total cost for an investor can be higher than the headline figure.
Some regions use slightly different names, such as ongoing charges figure, and the rules for what must be included can vary. Always read the footnotes in a fund document to see exactly which costs are in the number and which are excluded.
In practice
Real-world examples.
Example
A finance manager choosing a pension fund compares two global equity funds. One has a TER of 0.20% and the other 1.00%. On a $100,000 balance, the difference is $800 a year before any investment performance is considered. Over twenty years, compounding makes that gap much larger than the first-year figure suggests.
Example
A marketing executive investing a bonus sees a fund with a low TER but a 3% entry charge. She realises the headline TER does not include that charge and adds it to her cost comparison. Her total first-year cost is therefore higher than the TER alone implies.
Example
A small business treasurer places spare cash in a money market fund. Because returns are modest, a TER of 0.30% takes a visible share of the yield, and she moves to a cheaper share class. The saving is small in dollars but free to capture.
Formula
Calculation
TER = total annual fund costs / average net assets of the fund x 100
A fund has total annual costs of $1,200,000 and average net assets of $300,000,000.
TER = 1,200,000 / 300,000,000 = 0.004, which is 0.40%
An investor holding $50,000 in the fund bears an annual cost of 50,000 x 0.004 = $200.Case study
Seen in the real world.
Oakridge Growth Fund is an illustrative, fictional fund with $200,000,000 in assets. In one year its management fee, administration, custody and audit costs came to $1,800,000.
Its fund accountant divided the costs by average assets and reported a TER of 0.90%. A competing illustrative index fund of the same size spent only $300,000, a TER of 0.15%.
When the fund board saw the comparison, it asked the manager to justify the gap. The illustrative lesson is that TER turns a pile of cost lines into one number that investors and boards can challenge. The board concluded that fees should fall in line with the lower costs of comparable funds, and asked for a revised proposal. The fund accountant also pointed out that a drop in assets would push the TER up even if the costs stayed the same, because the same bills would be spread over a smaller base.
Watch out
Common mistakes.
- Comparing TERs between funds of very different types, such as a bond index fund and a specialist small company fund. The best choice weighs cost against the fund's objectives, risk and track record.
- Assuming TER includes every cost, when transaction costs and sales charges may be reported separately. Always check the footnotes of the factsheet to see which costs are in the figure.
- Choosing a fund on low TER alone, without checking performance, risk and tracking accuracy. A cheap fund that tracks its index poorly or takes unwanted risk can cost more in practice than a dearer one.
Questions
People also ask.
Is a lower TER always better?
Not always, because a higher-cost fund may deliver stronger returns after costs, but the cost is certain while the extra return is not.
Where do I find a fund's TER?
It is normally shown in the fund factsheet, prospectus or annual report. Check the latest annual report for the most recent figure, as older factsheets may be out of date.
Does TER change over time?
Yes, it can rise or fall as the fund grows, as fees change, or as costs are shared across more assets. Fixed costs are spread more thinly as assets grow, so successful funds often see their TER fall.
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