Shares in an investment fund are not free. Depending on the type of system, fees apply. One item is always included in this context: the total expense ratio, or TER for short. We explain what that is.
When you invest in a fund, you can participate in global economic growth with even small amounts. But which fund should you choose? An important criterion in this decision are the costs associated with the purchase. The so-called Total Expense Ratio (TER) is particularly important here.
We explain what is behind this key figure, why its level can be decisive for your income, what the TER provides information about – and what not.
What is the TER?
TER is an abbreviation for Total expense ratio. It is the English name of an important key figure for investment funds that deals with Total expense ratio translates.
It should make it transparent how high the current costs of a fund – i.e. the costs that are incurred every year. The costs that come together in the TER always refer to the sum of the money invested. That is why it is expressed as a percentage.
What is it for?
The Total Expense Ratio is intended to make it easier for you to decide for or against a specific fund by providing the Comparable costs of different funds power. This is important because high fees reduce the return on an investment. The yield is also called Return. However, the TER does not create full transparency about the costs (more on this below).
In addition, because the TER is expressed as a percentage, you can easily see how much the fees reduce the return on your investment. If the value of a fund with a TER of 1.2 percent has risen by around 6 percent within a year, its annual return after deduction of fees is only 4.8 percent (see below).
How can I see the TER?
The TER can be found in the so-called key investor information to an investment fund under “ongoing charges” as well as in Annual report of the fund. Both are prescribed in the German Investment Act. In addition, the total expense ratio is often also in the Factsheet, an information sheet that the fund companies issue for each fund.
How high should the TER be?
Basically: The lower the TER, the better for your return. An example illustrates this:
Let us assume that you invest 100 euros in one fund at a TER of 2 percent and 100 euros in a second fund at running costs of 0.5 percent. In this example, both funds have an average annual return of 8 percent. The first fund would bring you a plus of only 79 euros after ten years, while the second would bring you a plus of 106 euros.
After 20 years, the difference in the case described would have been even greater: Fund number one would have generated a return of 221 euros by then, fund number two a return of 325 euros. It becomes clear that the longer you stay invested, the greater the impact of the saved costs through a lower TER. This is due to the compound interest effect. We explain what that is exactly here.
But what is actually one acceptable amount for the TER? The average values for various types of funds compiled by the Federal Association of Investment and Asset Management provide a rough guide:
You can usually go even cheaper with so-called index funds, too “Exchange Traded Funds” called, or in short: ETFs. These are special equity funds that use a computer algorithm to generate a stock index such as the German leading index Dax or the international index MSCI World replicates. The TER here is usually between 0.2 and 0.5 percent.
The reason for that significantly lower costs and the associated higher income: ETFs are so-called “passive” funds which, unlike “actively” or manually managed equity funds, do not need a manager to control them. Instead, they automatically replicate an index and thus save the fund manager’s salary.
How is the TER calculated?
The total expense ratio puts two values in relation: the annual costs of running a fund and the average fund assets under management in a year. The figures from the previous financial year are used for the calculation. The TER can therefore have a different amount later than at the time of purchase.
Example: If a fund manages assets of 1 million euros and the costs for operation are 4,000 euros, the total expense ratio is 0.4 percent (4,000 euros / 1,000,000 euros = 0.004 x 100 = 0.4 percent).
If you now want to buy fund units with a value of 10,000 euros, it costs around 40 euros per year (10,000 euros x 0.004 = 40 euros).
Which costs are recorded and which are not?
Even if the TER is referred to as the total expense ratio – the key figure does not measure any cost factors.
- Administration and management fees
- Deposit coststhat the fund has to pay
- Examination costs for the annual report
- Advertising costs for brochures, advertisements, TV spots
- Other operating costs such as legal fees or fees for certain services
Not included are:
- Transaction costs for purchases and sales within a fund
- Performance fee, the performance-related remuneration of the fund manager
- Subscription fee (Agio) for investors, which is incurred once when you buy fund units from a bank advisor or fund broker
- Order fee, which is charged once instead of the front-end load if you buy fund units as securities on the stock exchange
- Return surcharge (Disagio) that some fund companies charge when you sell shares
- Other costs for investors like the bank fee for that Deposit account or transaction fees for buying and selling on the exchange
- License feesthat ETFs have to pay to track an index
For you as an investor this means: The costs shown are not complete. Therefore, in addition to the TER, you should always examine the costs that are not included before you buy a fund.
Good to know:
The fund costs are not the only criterion for deciding for or against a fund. The fund volume and whether the fund distributes profits or invests directly (reinvested) are also important. Funds with a larger volume are usually preferable to smaller ones because a fund can also be closed due to insufficient demand. If you are investing money for old age, an accumulation fund makes more sense because you don’t have to keep paying in the income yourself at new costs.