Total expense ratio is the total cost of investment to the investor who invests in a mutual fund, equity fund or an exchange-traded fund; which includes, but not limited to, the auditing costs of investment, the transactional costs of investment, legal fees, management fees, auditor fees, and many other miscellaneous operational expenses, which help the investor in determining the final return he/ she is going to get on the investment.
Total Expense Ratio Formula
The total expense ratio (TER) formula is used for investment funds. TER formula is very useful for investors because it shows them how much they have actually earned. No, it’s not enough to know the return on the investments; it’s also important to know the total expense ratio.
Here’s the TER Formula –
Example of TER Formula
Let’s take a simple example to illustrate the TER formula.
Binary Investments have been managing a new fund. It has the following information regarding its new fund –
- Total fund costs – $40,000
- Total fund assets – $410,00,000
Find out the TER of this new fund.
We know both the total fund costs and the total fund assets.
By using the TER formula, we get –
- TER = Total Fund Costs / Total Fund Assets
- Or, TER = $40,000 / $410,000,000 = 9.76%.
The investors need to see the Total Expense Ratio of this new fund and then compare the same with other investments to see whether this is a worthy investment for the investors or not.
Total Expense Ratio Example – Vanguard
As we can see from the below table, the TER of Vanguard funds range from 0.11% to 0.16%
Federal Money Market Fund has an expense ratio of 0.11%, whereas the California Municipal Money Market Fund has an expense ratio of 0.16%.
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Explanation of TER Formula
Understanding TER is important. It has two components.
- The first component is the total fund costs. Total fund costs mainly include management fees. Along with that, total fund costs also include legal fees, trading fees, operation expenses, and auditing fees.
- The second component of the TER is the total fund assets. In the case of any investment funds, a group of people manages the funds. And these funds are the assets of individuals who have invested in the instrument (e.g., mutual funds). These funds are called fund assets. In simple terms, fund assets are the market value of the funds managed by a fund manager or a team of management.
When we compare the fund expenses and the fund assets, we get a proportion of expenses in terms of assets. This TER can be used to find out how much expenses actually happen.
Use of TER Formula
The main reason for which TER is important to the investors is that TER directly affects the returns on their investments.
For example, let’s say that Mr. Rout has invested in a portfolio. He is expecting a return of 10% on his investments. Now, if he can find out the TER, he will get to figure out the actual return on his investments. Let’s say that the TER is 4%; then, the net return would be actually 6% even if it seems that he is getting a return of 10% on his investments.
TER formula is more when the fund is actively managed; because when the fund is actively managed, the operational expenses of the fund get increased. For example, if a fund is actively handled, then the personnel costs will likely go up. Actively managing a fund may also ensure a higher return and a quick reaction time.
On the other hand, if the fund is not actively managed, the TER is lesser. And return may also dry up. However, there are always exceptions.
You can use the following TER Calculator.
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TER Formula in Excel (with excel template)
Let us now do the same example of the TER formula in Excel.
This is very simple. You need to provide the two inputs of Total Fund Costs and Total Fund Assets.
You can easily calculate the ratio in the template provided.
Total Expense Ratio Formula Video
This article has been a guide to the Total Expense Ratio formula, its uses along with practical examples. Here we also provide you with TER Calculator with a downloadable excel template.