Mutual Fund Jargons Simplified
Mutual Fund Jargons Simplified
For many investors, financial jargon often becomes a roadblock to understanding mutual funds. Let’s break down some commonly used terms so that you can navigate your investments with confidence.
Core Terms You Must Know
1. Assets Under Management (AUM)
AUM refers to the total market value of all the investments a mutual fund or investment firm manages on behalf of its investors.
2. Asset Management Company (AMC)
An AMC is the professional manager of a mutual fund. It invests the pooled money in stocks, bonds, or other securities and takes care of all buy/sell decisions.
3. Net Asset Value (NAV)
NAV is the per-unit value of a mutual fund, calculated after accounting for expenses. It is updated daily and determines the price at which investors buy or sell units of a scheme.
4. Units
When you invest in a mutual fund, you receive units that represent your share in the scheme. For example, if you invest ₹10,000 in a fund with an NAV of ₹100, you’ll get 100 units.
5. Benchmark
Each fund’s performance is measured against a benchmark, such as Nifty 50 or Sensex. It helps investors evaluate whether the fund has performed better or worse than the broader market.
6. Credit Quality (Debt Funds)
For debt funds, credit ratings of securities in the portfolio matter. High-rated instruments are safer, while low-rated ones carry more risk. Always check a fund’s fact sheet to understand its credit quality.
7. Investment Objective
This outlines the fund’s financial goal (e.g., capital appreciation, income generation) and the level of risk it may take to achieve that goal. It helps investors match the scheme to their own goals and risk profile.
Types of Mutual Fund Schemes
8. Open-Ended Schemes
You can invest or redeem at any time. Most mutual funds are open-ended.
9. Close-Ended Schemes
Available only during the New Fund Offer (NFO) period. After that, you can buy/sell units only through stock exchanges until maturity.
10. New Fund Offer (NFO)
This is how AMCs launch new schemes in the market. During the NFO, investors can subscribe at face value (usually ₹10 per unit).
Investment Options Within a Scheme
11. Growth Option
Profits are reinvested back into the scheme, leading to growth in NAV. No payouts are made during the investment period.
12. IDCW (Income Distribution-cum-Capital Withdrawal) Options
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IDCW Reinvestment: Dividends declared are reinvested into the same scheme.
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IDCW Payout: Dividends are directly paid out to investors.
Loads and Charges
13. Entry Load
A fee charged when you invest in a mutual fund. (Now, most AMCs in India have removed entry load.)
14. Exit Load
A fee charged if you redeem units before a specified period. For example, with a 1% exit load and a NAV of ₹100, you get ₹99 per unit.
15. Total Expense Ratio (TER)
The annual cost of managing a mutual fund, expressed as a percentage of AUM. Lower TER = higher net returns for investors.
Taxation Concepts
16. Indexation Benefit
For long-term debt funds and bonds, indexation adjusts the purchase price for inflation, reducing your taxable gains. This benefit does not apply to FDs.
Popular Investment Plans
17. SIP (Systematic Investment Plan)
Invest a fixed amount at regular intervals (monthly/quarterly), similar to a recurring deposit. Helps in disciplined wealth creation.
18. STP (Systematic Transfer Plan)
Transfer a fixed sum from one scheme to another at regular intervals. Useful for moving money gradually from debt to equity (or vice versa).
19. SWP (Systematic Withdrawal Plan)
Withdraw a fixed amount from your mutual fund at regular intervals, often used as a retirement income strategy.
Portfolio Strategies
20. Diversification
Spreading investments across asset classes and securities to reduce risk.
21. Asset Allocation
Balancing your portfolio between equity, debt, gold, and cash depending on your goals, risk appetite, and investment horizon.
Performance Metrics
22. Sharpe Ratio
Measures risk-adjusted returns. A higher Sharpe ratio indicates better returns for the risk taken.
23. R-Squared
Shows how closely a fund’s performance mirrors its benchmark index (scale of 0–100).
Types of Funds
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Index Funds: Replicate a stock market index like Nifty 50.
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Growth Funds: Focus on capital appreciation; more volatile.
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Gilt Funds: Invest exclusively in government securities.
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Balanced Funds: Combine equity and debt to provide both growth and income.
⚠️ Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.
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