TER (total expense ratio)
The TER is the annual percentage a fund or ETF deducts from assets to cover management, custody and administration. It is not billed separately: it is subtracted day by day from the net asset value, so published returns already have it taken out. It looks small and is not: over long horizons, the difference between 0.20% and 1.20% a year eats a very substantial share of the final outcome, through the same compounding that grows the investment.
How it is calculated
TER = the year's ongoing charges ÷ the fund's average net assets. It is an annual percentage and no invoice ever arrives: it is deducted from the net asset value day by day, so it is already subtracted from the number you see. On €20,000 in a fund with a 1.20 % TER, the cost for the year is €240. Put over time, which is where it shows: deducting 1.20 % a year for ten years takes about 11.4 % of the capital, and doing it at 0.20 % takes 2.0 %. That arithmetic assumes no return at all: it is simply what the fee removes for being there.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is NOT
It is not everything you pay. The TER leaves out the performance fee where there is one, the portfolio's own trading costs, and any entry or exit charges. And it is not one figure per fund but one PER SHARE CLASS: the same fund, with the same portfolio and the same manager, can cost 0.85 % in one class and 2.81 % in another. Comparing two funds by name without checking the class and the ISIN is comparing two different things.
See it on real data
Celsmar computes this from the accounts companies file with their regulator, and shows which line every figure comes from. Free to start, no card.
Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.