The pros and cons of using the TER to check a unit trust’s costs

Julie Brownlee, Fsp Invest, 16 Feb. 2015

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

Unit trusts offer investors an easy way to invest in the stock market. And offer instant diversification.

Yet unit trusts can have high fees and costs, so how can you check how these compare amongst different funds?

You can calculate a fund’s total expense ratio (TER).

Read on to find out the pros and cons of a unit trust’s TER…

The costs of investing in unit trusts

Costs can have a big impact on your returns as an investor. That’s why it’s vital you watch them closely and look for the best offerings.

When it comes to investing in unit trusts, the more you pay to invest in a fund, the less money you have to meet your investment goal.

You need to keep your costs as low as possible.

If you’re looking to invest in unit trusts, you can check the TER. The TER is the ongoing charges figure for a unit trust. It’s included in each fund’s fact sheet.

The TER gives you the annual costs of a unit trust as a percentage of its average asset value over one year.

The TER includes:

  • What the fund manager charges for running the portfolio;
  • Administration costs;
  • Marketing costs; and
  • Any costs relating to regulation.

It can be a handy way to compare the costs of different funds.

But the TER doesn’t tell you everything about a unit trust’s costs

The TER doesn’t include costs such as:

  • Broker commissions for changes made to the fund’s portfolio;
  • Taxes paid on buying and selling shares; and
  • The spread (the difference between the buying and selling prices of shares).

What this means for you is a fund that looks like it has low costs could actually have high costs if the fund manager regularly makes a lot of changes to the portfolio.

You can use TER to help you pinpoint potential investment opportunities, but be aware that it doesn’t reveal the whole story about costs and fees.

So there you have it, the pros and cons of using the TER to check a unit trust’s costs.

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