The total expense ratio (TER), also known as the ‘expense ratio’ is a way to capture the annual costs associated with running a fund such as a unit trust. Total costs include management fees, trading fees, legal fees, audit costs and other operational expenses. These are usually expressed as a percentage of a fund’s assets.
So, for example, if total expenses are £20m and the fund has assets of £400m, the TER is ((20/400) x 100%) or 5%. Ideally as an investor you want a fund with a low TER as fees eat into returns. It is also worth noting that TERs do not always include all expenses – some performance-related fees for example may be left out.
The lowest TERs tend to come with passive funds – on a cheap exchange-traded fund (ETF), for example, they may be below 0.5% per year.