What a 1% TER actually costs you over 20 years

One percent sounds like rounding. Over twenty years it is not: on a portfolio built from a ten thousand euro start and three hundred euro a month, a one percent ongoing charge takes a five-figure sum, and most of what it takes is not the fee itself but the growth the fee never got to compound.

Try it with your own numbers

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Why the damage is larger than the fee

The intuitive reading of a one percent charge is that it costs one percent of your balance each year. That part is true and it is the smaller part.

The money taken in year one would otherwise have stayed invested and compounded for the remaining nineteen. So would the money taken in year two, for eighteen. What the charge removes is not a slice of the balance but a slice of every future return that balance would have earned, which is why the gap widens rather than staying proportional.

Run the calculator with the same inputs at five years and at thirty. The percentage of the final balance consumed by the charge climbs as the horizon lengthens, from a nuisance to a material share of the outcome.

What the number actually covers

The ongoing charge, often quoted as TER, covers the fund’s running costs: management, administration, custody, audit. It is deducted from the fund’s assets continuously rather than billed to you, which is precisely why it is easy to miss. No line on your statement says you paid it. It arrives as a slightly lower price than the fund would otherwise have had.

Several costs sit outside that figure and are worth knowing about separately:

• Transaction costs inside the fund — what it pays to trade its own holdings.
• The spread you pay when buying or selling an exchange-traded fund.
• Your broker’s charges — commission, custody or currency conversion, depending on the broker.
• Withholding tax inside the fund, which is not a fee at all but does reduce what reaches you — see how dividend withholding tax works.

The comparison that is usually being made

Fee discussions normally come down to a difference rather than an absolute: an index fund at around 0.2 percent against an actively managed fund at around 1.5 percent. The gap of roughly 1.3 points is what compounds.

Those come from the same arithmetic the calculator runs: ten thousand euro to start, three hundred a month, a seven percent gross return over twenty years, which reaches about €197,000 before charges. Change the horizon or the return and they move, but the shape does not: the relationship between the charge and the share of wealth it takes is not linear, and it steepens with time.

What a higher charge has to do

A fund charging 1.5 percent where a comparable index fund charges 0.2 has to earn 1.3 percentage points more, every year, before its holder is even. That is the arithmetic and it is not a claim about whether any given fund does so — some have and some have not, and past results do not establish future ones.

The reason the fee gets attention is simply that it is the one input you know in advance. Returns are uncertain; the charge is printed in the documents before you commit.

Finding what you are paying

• The ongoing charge is in the fund’s key information document, usually one page, quoted as an annual percentage.
• Weight it by holding size. A high charge on two percent of your portfolio matters less than a middling one on forty percent.
• Check for overlap. Two funds holding largely the same companies mean paying two sets of charges for one exposure, which is also a concentration question — see how concentrated is too concentrated.