Expense Ratio (OCF/TER)
Plain-English definition of Expense Ratio (OCF/TER) — part of our investing glossary.
Definition
The annual cost of holding a fund, expressed as a percentage of assets. A 0.2% expense ratio on £100,000 is £200/year. Over decades this compounds significantly — a 1% vs 0.2% fund over 30 years costs around 20% of the total returns.
Worked example
On a £100,000 portfolio, a 1% fund fee costs £1,000/year; a 0.2% tracker costs £200/year. Over 30 years at 6% returns, the cumulative cost difference runs to roughly £180,000 — a sum that often exceeds a decade of pension contributions.
Why it matters
Investing is unusually unforgiving of vocabulary gaps. Costs compound, inflation compounds, and the gap between a "5% return" and a "5% real return after 0.3% fees" is the difference between a comfortable retirement and a tight one.
Common mistake
Focusing on nominal returns and headline past performance rather than fees, tax wrappers, and real (post-inflation) returns. A cheap tracker inside an ISA almost always beats an expensive active fund in a taxable account over 20+ years.
Calculators that use this concept
See also
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- Gilt (UK Government Bond) — A gilt is a UK government-issued bond. Short-dated gilts are generally considered one of the safest investment…
- CPI Inflation — The Consumer Prices Index measures the average change in prices of a representative basket of UK goods and ser…
- Real vs Nominal Return — A nominal return is the headline investment return. A real return is the nominal return minus inflation. A 7% …