# Total Expense Ratio (TER): Definition and How to Calculate

![Total Expense Ratio](https://www.investopedia.com/thmb/ryXtAnbuRmo-WRknuBzTjS561D0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/DDM_INV_total-expense-ratio_final-9c660da20f0f4648b5b76b1bb3d07e58.jpg)

*— Eliana Rodgers / Investopedia*

> **Definition**
>
> The TER covers the annual costs of running a fund based on all the known expenses associated with the fund’s operation.

## What Is the Total Expense Ratio (TER)?

The total expense ratio (TER) is a measure of the total costs associated with managing and operating an [investment fund](https://www.investopedia.com/terms/i/investment-fund.asp) such as a mutual fund. This expense ratio is the fee charged to investors. These costs consist primarily of [management fees](https://www.investopedia.com/terms/m/managementfee.asp) and additional expenses such as trading fees, legal fees, auditor fees, and other operational expenses.

The total cost of the fund is divided by the fund’s total [assets](https://www.investopedia.com/terms/a/asset.asp) to arrive at a percentage amount, which represents the TER. The TER is also known as the net expense ratio or [after reimbursement expense ratio](https://www.investopedia.com/terms/a/arer.asp).

### Key Takeaways

*   The expense ratio is the fee paid by those who invest in a fund.
*   It is a measure of a fund’s [operational efficiency](https://www.investopedia.com/terms/o/operationalefficiency.asp).
*   Investors pay attention to the expense ratio to determine if a fund is an appropriate investment for them after fees are considered.
*   TER is also known as the net expense ratio or after reimbursement expense ratio.

## How the Total Expense Ratio (TER) Works

The size of the TER is important to investors as the costs are withdrawn from the fund, affecting investors’ [returns](https://www.investopedia.com/terms/r/return.asp). For example, if a fund generates a return of 7% for the year but has a TER of 4%, then the 7% gain is greatly diminished to 3%.

The TER provides a way for the annual costs of running a particular fund to be covered. It takes all of the known costs associated with the fund’s operation and expresses them as a single number, generally as a percentage, drawing its basis from the assets associated with the fund. This means that the gross amount paid by investors as the TER is dependent on the size of the fund.

The funds supplied through the TER are used to support the management, trading, and legal fees associated with the fund, as well as any [audit](https://www.investopedia.com/terms/a/audit.asp) costs or general [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp). Anytime a fund incurs higher or lower operating expenses, those changes are likely passed along within the TER.

The more [actively managed](https://www.investopedia.com/terms/a/activemanagement.asp) the fund, the higher the associated TER. This is due to increased personnel costs, as well as increased transaction-based fees—the fund manager pays a [brokerage fee](https://www.investopedia.com/terms/b/brokerage-fee.asp) each time a buy and sell trade is executed. By comparison, an automated or [passive](https://www.investopedia.com/terms/p/passivemanagement.asp) fund has significantly lower costs of operation, resulting in a lower TER.

## Total Expense Ratio (TER) Formula and Calculation

Below is the formula and the steps to calculate the TER:

![TER = total fund costs/total fund assets](https://www.investopedia.com/thmb/6KUDRFsiTfPmbAGWYg7he29vZms=/1280x0/filters:no_upscale():max_bytes(150000):strip_icc()/latex_9e2c1ac6ab137d491840c617b8949346-5c5069e2c9e77c0001d7bce5.jpg)

*TER formula.*

To calculate the TER:

*   Obtain the total assets of the fund, which can be derived from financial disclosures that [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) report to regulators or are disseminated to analysts and investors via a [prospectus](https://www.investopedia.com/terms/p/prospectus.asp). This information can usually be found easily on the fund's webpage as well.
*   Obtain the total costs from the prospectus, which can be more challenging since the TER accounts for all costs associated with operating the investment fund, including trading costs, management costs, and overhead and administration costs (such as [12b-1 fees](https://www.investopedia.com/terms/1/12b-1fees.asp), which are the costs of marketing the fund).  
    

## Understanding Operating Expenses

Operating expenses, or [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp), cover any outgoing financial obligations associated with the management of the fund and the corresponding transactions. This can include employee compensation and brokerage fees, in addition to any [accountant](https://www.investopedia.com/terms/a/accounting.asp) fees.

Other common expenses include [shareholder](https://www.investopedia.com/terms/s/shareholder.asp) communications and [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp), record-keeping mechanisms, and custodial services from the overseeing organization or asset manager.

A small percentage of the TER may be directed to other business operation costs. This can include expenses as simple as space rental and utilities for the business. Often, these expenses are referred to as [overhead](https://www.investopedia.com/terms/o/overhead.asp) and include any financial obligation that is not necessarily directed to the actual production of a good or service.

## How Does the Total Expense Ratio (TER) Differ From the Gross Expense Ratio (GER)?

The [gross expense ratio (GER)](https://www.investopedia.com/terms/g/gross-expense-ratio.asp) is the total percentage of a mutual fund’s assets that are devoted to running the fund. In some cases, a fund may have agreements in place for waiving, reimbursing, or recouping some of the fund’s fees. This is often the case for new funds. An investment company and its fund managers may agree to waive certain fees following the launch of a new fund to keep the expense ratio lower for investors.

The TER represents the [fees](https://www.investopedia.com/terms/f/fee.asp) charged to the fund after any waivers, reimbursements, and recoupments have been made. These fee reductions are typically for a specified time frame, after which the fund may incur all full costs.

## What Are the Limitations of the TER?

The TER is meant to capture the entire cost that an investor can expect from owning an investment fund. However, some charges, especially those that are either made only once or made from the investment capital, may not be included in the TER. These include [commission](https://www.investopedia.com/terms/c/commission.asp), stockbroker fees, securities transfer tax, redemption fees, and sales load charges.

## The Bottom Line

The total expense ratio (TER) can help an investor understand the costs associated with investing in a particular [investment fund](https://www.investopedia.com/terms/i/investment-fund.asp). This can be a measure of the fund's efficiency and help to see if it's an appropriate investment.