12 Important mutual fund term one should know

12 important Mutual Fund terms you must know about

Posted on Posted in Advice

New to mutual funds and don’t know about the basic terms?

Here are few that would help anybody investing in mutual funds beginners or not. These are some of the must-know terms before investing in mutual funds.

1.Net Asset Value (NAV):

NAV is difference between value of your liabilities and value of your fund’s assets. These are used to define whether the fund is overvalued or undervalued. These have a substantial effect in open end funds. NAV are the fund’s value which will be given to the investor at the time of investment withdrawal. With close-end fund, price per unit is agreed up by market and is either below or above NAV.

NAV is difference between value of your liabilities and value of your fund’s assets. These are used to define whether the fund is overvalued or undervalued. These have a substantial effect in open end funds. NAV are the fund’s value which will be given to the investor at the time of investment withdrawal. With close-end fund, price per unit is agreed up by market and is either below or above NAV.

Image source: https://www.creatrust.com/fund-promoters/hedge-funds/how-to-calculate-net-asset-value-per-share

2.Asset Under Management (AUM):

AUM is the total market value of the investments the financial services company manages on behalf of their clients/investors. It is the total market value of investments managed by any asset management company. This changes with the flow of money in or out of any fund or company’s core investments. AUM is chiefly used by Asset Management Companies to compare their AUM with competitors as a degree of success and to weigh asset manager’s performance.

3.Asset Management Company (AMC):

AMC is a management firm that invests pooled fund of investors into securities that counterpart client’s financial requisites. These companies provide financiers more diverse investment options than the client could gather himself. AMC is appointed to manage investment, marketing, accounting and other functions related to a fund.

4.Systematic Investment Plan (SIP):

SIP is investment made periodically in small amount instead of paying in lump sums. Investment frequency could be monthly, yearly, or quarterly. Investing in SIP means contributing a share in stock market without actively timing them and gaining profits by buying more units when price falls down and vice versa. This is similar to recurring deposit with post office or bank with only difference that the small amount is invested in mutual fund rather than bank.

SIP

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5.Expense Ratio:

Expense Ratio is measure of what is per unit cost spent for managing funds. It is calculated by dividing fund’s total expense by its Asset under Management (AUM). They include operating charges too such as transfer fee. The NAVs of a scheme is reported after deducting such all the expenses. Expense ratio is disclosed only once in six months.

6.Liquid funds:

Liquid Funds are those kind of funds that invest in securities, money market and debt instruments with residual maturity of up to 91 days. The minimum investment amount should be less than 10 lakhs. These investments are not held up for long time as liquid funds do not have a lock-in period. Here the returns are not guaranteed as it depends on how the market performs contrasting fixed deposits but an investor eyeing for better returns make decision to invest in liquid funds rather than fixed deposit.

Liquid Fund

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7.Load:

Load is that fee charged when units of fund is bought or sold. Whenever units of a fund is bought a percentage of amount is paid as fee. This fee is entry load. Similarly on selling the fund we pay exit load. If the fund has a policy to charge entry load, it will not charge exit load and vice versa. Load is calculated as percentage of NAV.

8.Equity schemes:

These schemes primarily deals with stocks which can be actively of passively managed. This allows investors to buy stock in bulk with more ease then they could purchase individual securities. Equity funds have 3 key goals: capital profit, income, or both.

9.Portfolio:

Grouping all the financial assets such as stocks, bond, and cash is Portfolio. Even their exchange-traded counterparts is included in the portfolio. These portfolios can be managed by the investors directly or by financial professionals, hedge funds, banks or other financial institutes. These collection of investments is a single individual or organization. To limit your risk, you can diversify your portfolio.

Mutual-Funds

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10.Systematic Transfer Program (STP):

This program enables an investor to invest lump-sum amount in a scheme and frequently relocation some amount to another scheme. There are two kinds: Fixed STP and capital appreciation STP. In former, a fixed amount is transferred from one investment to other. Whereas in latter, only the profit part of one investment is transferred to another. The transfer is generally made from debt funds to equity funds when the market is performing good or vice versa.

11.Systematic Withdrawal Plan (SWP):

This service allows the investor to extract a fixed or variable amount from the mutual fund scheme on a date every month, quarterly, semi-annually or annually according to the investor’s requirement. The cash flow can be customized as per the requirement: whether to withdraw fixed amount or cash gains of his investments.

Systematic Withdrawal Plan

Image source: https://www.sbimf.com/Learning_Center/Tools_and_Calculators/swp-calculator

12.Asset allocation:

Asset allocation is the investment strategy that endeavors to stabilize the risk and reward by altering the percentage of each asset in the portfolio according to the investor’s risk forbearance, capital targets and venture time frame. It becomes easier for the investor to monitor the amount and ratio of investment and make a perfect portfolio as per the market performance and economic conditions.

Asset Allocation

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