How to weigh up unit trusts with the help of the TER

Julie Brownlee, Fsp Invest, 04 Sep. 2014

Tags: unit trusts, ter, total expense ratio, unit trust costs, investing in unit trusts, costs of unit trusts, what is ter



If you’re interested in buying into unit trusts, you’ll find there are hundreds of them available. They vary from replicating the Top 40 Index to concentrating on mining companies.

But if you’ve narrowed down what type of unit trust to invest in, how can you see what the costs are like between funds?

That’s where the TER comes in.

So what is the TER? And how can you use it when investing in unit trusts?

Let’s take a closer look…



What is the TER?


When it comes to investing in unit trusts, as with any other investment, costs matter. The higher the costs to invest in a unit trust, the less money you have working for you in the market.

Keeping your costs as low as you can is vital.

So to help you to weigh up the costs associated with different unit trusts, fund managers will publish the total expense ratio (TER) of the fund in its fact sheet.

The idea of the TER is that it tells you the annual costs of a fund as a percentage of its average asset value over a year.

TER = Total costs / total assets

The total costs part of the TER includes:

  • The fund manager’s fee for running the fund’s portfolio;
  • Administration costs;
  • Marketing costs; and
  • Any regulation costs.

By looking at the TER of different funds you might want to invest in, it gives you a good way to compare the different costs involved in different funds.


The disadvantages of the TER


But the TER doesn’t include all costs that will affect a fund’s portfolio.

For instance, it doesn’t include any broker fees the fund incurs for buying and selling shares. Nor does it include the fees associated with buying and selling shares, such as securities transfer tax.

So if you find a fund with a low TER, but it buys and sells a lot of shares throughout the year, the fund could carry higher costs than a fund with a high TER that doesn’t buy and sell shares very often.

The TER is a good starting point to weigh up funds. But you need to try to find out more about the fund to see if the TER is a good reflection of what goes on in the fund or not.

So there you have it, how to weigh up unit trusts with the help of the TER.

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