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Total Expense Ratio (TER)

Updated on May 29, 2013

The Total Expense Ratios (often abbreviated as TER) measures the expenses of investment funds. For example, when there is a higher yield above the market benchmark, the investment fund and the investment fund manager receives 20% of the additional income, and the investor, that is, the investment fund share holder receives only 80% of the excess yield.

The yield of the investment fund already included the Total Expense Ratio. To get the actual return on the side of the investment fund, we still need to add the TER to the published yields (to get the gross yield not the net yield). For example the published yield of the fund is 5%, has a TER of 3%, so the actual gross return of the fund is: 5+3=8%. Please note again, that this is gross return; that is before costs, expenses and payments to fund investors, in other words: the EBITDA of the fund.

Now let’s see what the actual formula for TER is. Total Expense Ratio is obtained by simply dividing the total operational costs by the total assets of the company:

Total Expense Ratio = Total Fund Operational Costs / Total Fund Assets.

Assets of the fund are investments + retained past net profits of the fund.

The fund costs like the maintenance- and sell cost are not included in the Total Expense Ratio (TER), they are separate. TER only measures the total costs of operating, and running the investment fund. Such operating fees include wages, salaries, bonuses for high performance, transaction fees, trading fees, legal-, and administration fees, and other expenses.

For example a fund has total assets of $10 billion; its total operational costs are 500 million. The Total Expense Ratio of this fund is 5% (500 million/10 billion).

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