Total Expense Ratio (TER) and Mutual Fund Investment

All mutual fund investors must be receiving e-mails from mutual fund houses on Total Expense Ratios (TER). The details are being furnished by the fund houses as directed by Securities and Exchange Board of India (SEBI) in February 2018. All mutual fund houses have now been required to intimate their investors before making changes to the Total Expense Ratios. They are also required to publish scheme wise updated TERs daily on their website. 

What is Total Expense Ratio (TER)?

As per SEBI directive, MFs must consolidate all the costs they charge to investors, into TER. It should be total of all charges like management fees, marketing costs, transaction costs and distributor commissions. As per the norms, a slab structure between 1.5 and 2.5 per cent of a scheme’s average assets is stipulated as maximum base TER. Mutual Funds have the freedom to charge additional charges up to 0.30 per cent for inflows from smaller cities and towns plus the GST component. This along with the base TER is the total TER for the scheme. Thus, total TER represents all expenses that you have to incur before you receive returns on your portfolio. TER has to be specified scheme wise. 

Why SEBI has come out with stipulation on Total Expense Ratio(TER)?

SEBI has come out with the direction on Total Expense Ratio to ensure transparency in charges. The charges play a crucial role in portfolio return. An increase of even 0.25 per cent in TER can make a huge difference in the portfolio return, especially if the investment is for long term. Further, the impact of change in TER depends on the nature of your investment. Equity or hybrid categories offer annual returns in the range of 10-15 per cent. A small change in TER may not make huge difference in them in the short term. In the case of a debt scheme with lower annual returns in the range of 6-7 per cent, even a minute spike in charge 0.1 per cent can have huge impact on the overall corpus. 

You may receive frequent communications from your fund house. Instead of getting panicked, it is better to compare the TER with the overall return from the scheme to have a judicious evaluation.  Further, it is always advisable to compare the TER of the scheme intimated by your fund house with that of the competitor for similar category of scheme. SEBI has now rationalized the schemes that can be offered by different fund houses. 

TER gets embedded into NAV. If your investment is continuously giving better returns compared to respective index or schemes by competitors, sticking on to your scheme, even if the TER is slightly on higher side, is advantageous.  

Direct plan or distributor mode which is advantageous?

If you have sufficient time to carry our researches and sufficient idea about various investment schemes, then direct plan is better for you as you are saving on commission to distributor or agent. However, if you require the support and guidance for choosing appropriate scheme and completing the formalities, it is better to choose the distributor mode. With the implementation of TER, you will have a better understanding of the commission payable to agent or distributor. If Total Expense Ratio for direct investment is 2 per cent and that for regular mode is 2.50 per cent, the commission payable to your agent is 0.50 per cent. Here also, if you are receiving required support and better advice from your agent for maximizing returns, stick on to your agent.