JARGON SIMPLIFIED

Total Expense Ratio (TER)

Apart from risks and returns, investors must look at the costs involved while investing in mutual funds. Though these costs are a small component, they can knock down investors' earnings especially if a scheme does not perform well. TER is an annual charge on AUM in percentage terms and is calculated as (total expenses during an accounting period) * 100 / total net assets of the fund. The ratio includes investment management and advisory fees, sales/agent commissions and ongoing service fees, legal and audit fees, registrar and transfer agent fees, fund administration expenses, and marketing and selling expenses. The NAV of a mutual fund scheme is net of all liabilities including TER and, hence, a lower TER results in higher returns and vice versa. Investors must invest in a scheme which charges a lower TER compared to peers as higher expenses reduce returns of the fund.

Treynor Ratio

A variant of the Sharpe Ratio, this measures the risk-adjusted performance for each unit of dispersion measured by beta (i.e. market risk). This ratio is similar to the Sharpe Ratio, only it uses beta as the volatility measurement. The ratio divides the difference of the average return of a fund and the risk-free rate by beta (market risk) of the fund.

Trigger Facility

Mutual funds offer an optional feature that gets automatically activated (through an alert) on the occurrence of a pre-defined event. This facility allows an investor to fix a date, NAV or the index level at which he/she can enter or exit a fund or switch to another fund. Investors can choose a one-time trigger (deactivated once the action is complete) or opt for repetitive triggers wherein the fund house will continue to make the pre-described changes. There are different types of triggers such as NAV, index-based, time-based, capital appreciation/depreciation, entry trigger etc.