21 Basic terminologies in mutual funds should be known before investment.
1. Net Asset Value (NAV):
NAV defines the per-unit share market value of a mutual fund. It is calculated by dividing the
total value of the fund’s assets by the number of outstanding units.
– Example: If amutual fund has assets worth ₹1 crore and has issued 1 lakh units, the NAV
would be ₹100 (₹1,00,00,000 / 1,00,000).
2. Asset Management Company (AMC):
The company is responsible for managing and operating the mutual fund. Investors buy
units from the AMC.
– Example: HDFC Asset Management Company manages various mutual fund schemes.
3. Systematic Investment Plan (SIP):
SIP allows investors to regularly invest a fixed amount in a mutual fund at
scheduled intervals.
– Example: Investing ₹5,000 monthly in an SIP of a particular fund.
4. Systematic Withdrawal Plan (SWP):
SWP enables investors to withdraw a fixed amount regularly from their mutual fund
investment.
– Example: Withdrawing ₹10,000 monthly through an SWP.
5. Systematic Transfer Plan (STP):
Through STP mode investors can transfer a fixed amount regularly from one mutual fund
scheme to another mutual fund.
– Example: Transferring ₹20,000 monthly from a debt fund to an equity fund.
6. Load:
A fee charged by mutual funds, either at entry (front-end load) or exit (back-end
load).
– Example: A 2% entry load means ₹2 will be charged for every ₹100 invested.
7. Expense Ratio:
The annual fee charged by the fund house to manage the mutual fund is expressed as a
percentage of the average assets.
– Example: A fund with an expense ratio of 1% will incur ₹1,000 in fees for a ₹1,00,000
investment.
8. Dividend:
Distribution of profits by the mutual fund to its investors.
– Example: Receiving ₹500 as a dividend from an equity mutual fund.
9. Capital Gain:
The profit made when selling mutual fund units at a higher price than the purchase
price.
– Example: Selling units for ₹1,20,000 when the purchase cost was ₹1,00,000 results in a capital
gain of ₹20,000.
10. KYC (Know Your Customer):
A one-time process to verify the identity of investors.
– Example: Submitting required documents like Aadhar card and PAN for KYC.
11. ELSS (Equity Linked Savings Scheme):
A type of equity mutual fund with a lock-in period, offering tax benefits under
Section 80C.
– Example: Investing ₹1,50,000 in an ELSS to save on income tax.
12. Diversification:
Make investments in various asset classes to reduce risk of your portfolio.
– Example: Allocating funds to both equity and debt mutual funds for a diversified
portfolio.
13. NAV per Unit:
NAV means the value of one unit of a mutual fund held by you in your portfolio.
– Example: If the NAV is ₹50, each unit is valued at ₹50.
14. Benchmark Index:
A standard against which the performance of a mutual fund is measured.
For example: Nifty 50 or Sensex can be benchmarks for equity funds.
15. Liquid Fund:
A Liquid Fund is a mutual fund that invests in short-term debt instruments in the market.
– Example: Parking emergency funds in a liquid fund for easy withdrawal.
16. AUM (Assets Under Management):
The total market value of all assets managed by a mutual fund.
– Example: If a fund manages ₹500 crores, its AUM is ₹500 crores.
17. Redemption:
The process of selling mutual fund units.
– Example: Redeeming 100 units at ₹50 each results in ₹5,000.
18. Risk-Adjusted Return:
Evaluating a fund’s return considering the level of risk taken.
– Example: Comparing two funds with similar returns but different volatility.
19. Volatility:
The degree of variation in a fund’s returns.
– Example: A high volatility fund may show larger price fluctuations.
20. Rupee Cost Averaging:
Investing a fixed amount regularly, results in more units when prices are low
and fewer units when prices are high.
– Example: ₹5,000 invested monthly, buying more units when the NAV is ₹50 and fewer when it’s
₹60.
21. Exit Load:
A fee is charged when selling mutual fund units.
– Example: A 1% exit load means ₹1,000 will be charged on selling ₹1,00,000 worth of units
within the exit load period.
Also, Check
What is a mutual fund expense ratio?
What is the average expense ratio for mutual funds?
The average expense ratio for mutual funds varies depending on the type of fund and its investment strategy. According to the Investment Company Institute, the average expense ratio for equity mutual funds is 0.47%, while hybrid funds average 0.57% and bond funds average 0.39%
Actively managed mutual funds tend to have higher expense ratios than passively managed index funds. The average expense ratio for actively managed mutual funds is between 0.5% and 1.0%, with few exceeding 2.5% On the other hand, the typical expense ratio for passive index funds is about 0.2%
It’s important to note that a lower expense ratio is generally better, as it means lower costs for investors
What is the difference between active and passive mutual funds?
Active mutual funds are managed by a professional portfolio manager who actively selects individual securities to outperform the market. The fund manager relies on research and expertise to make investment decisions. Active mutual funds typically charge higher fees than passive mutual funds, and many fail to beat the market consistently
Passive mutual funds, on the other hand, seek to replicate the performance of a particular index, such as the S&P 500. Passive mutual funds do not require the active buying and selling of securities like active funds. Instead, they try to mimic the composition and performance of a specific index. Passive mutual funds typically have lower fees than active mutual funds
Here are some key differences between active and passive mutual funds:
| Criteria | Active Mutual Funds | Passive Mutual Funds |
|---|---|---|
| Investment Strategy | Actively managed by a portfolio manager who selects individual securities to outperform the market | Passively managed to replicate the performance of a particular index |
| Fees | Higher fees due to active management | Lower fees due to passive management |
| Performance | May outperform the market, but many fail to beat the market consistently | Tend to perform more consistently, but your performance is—by definition—the average |
| Risk | Higher risk due to active management | Lower risk due to passive management |
It’s important to note that both active and passive mutual funds have their own advantages and disadvantages. The choice between the two depends on your investment goals, risk tolerance, and investment horizon. i