Getting the basics right – Decoding mutual funds jargon
Investing in mutual funds can be considered a good starting point for anyone who wishes to invest in the stock market. Mutual funds are designed to offer you vast exposure while managing your investment risk through smart diversification. But how to choose the right fund for yourself? And what are those key mutual fund jargon that you should be aware of before investing in any mutual fund investment plans?
Here are some important mutual fund terms that can make you a more informed investor and help your long-term investment decisions.
- AMC: AMC or Asset Management Company is the company that manages your mutual fund and a fund manager at the AMC takes all the decisions about the selection of stocks and bonds for investing your money.
- AUM: AUM or Assets Under Management is the mutual fund term used to indicate the total market value of investments managed under a firm or a scheme. AUM indicates how much money is already invested in the fund and can be a good indicator of the fund’s popularity and success.
- Open-ended fund: Such funds are always open to investment, and you can repeatedly invest in it to increase your total investment.
- Close-ended fund: Such funds are only available for a limited time, and neither new investors nor existing investors can invest in them once the allotment window is closed.
- Units: In a mutual fund, units are like shares allocated to an investor in return for the capital invested.
- NAV: Net Asset Value or NAV is the value of each mutual fund unit after deduction of expenses. Let’s say you invest Rs. 1,000 in a fund with NAV of Rs. 100. Then you will be allocated 10 units of the mutual fund (Rs. 1,000/Rs. 100 = 10). When the fund’s NAV moves up from Rs. 100 to Rs. 120, your investment will also grow from Rs. 1,000 to Rs. 1,200, but your units will remain the same, i.e. 10.
- Entry load: This is the fees levied by an AMC to the investors when they first invest in a mutual fund. However, in 2009, market regulator Securities and Exchange Board of India (SEBI) did away with this practice of charging entry loads on all mutual fund schemes.
- Exit load: This is the fees charged by an AMC if the investor exits a fund. Typically, exit load is only applicable for short-term investors.
- TER: TER or Total Expense Ratio is the charges applied by an AMC before allocating units to you.
- YTM: Yield to Maturity or YTM is a mutual fund jargon used to explain the total yield or returns generated by a fund upon its maturity.
- SIP: Systematic Investment Plan is a mode of investment, wherein instead of buying all the fund units in lump sum, you buy them in installments. This is likely to minimise your risks and maximise your returns.
- Growth fund: In such funds, any profit or bonus announced by an AMC is reinvested in the fund, and an investor gets additional units allocated.
- Dividend: This is the surplus or profit distributed by an AMC to all the investors in a mutual fund. It could be paid out on a monthly, quarterly, or annual basis.
Understanding the jargon around mutual funds can be a good starting point to start your investment journey. If you are new to investments and financial planning, seeking an expert advice from a financial advisory service can be a good option. A good financial advisor will not just create an effective financial plan tailor-made for your needs, but also select appropriate financial products for you that can help you to reach your financial goals.