Mutual Fund Terms You Must Know
Mutual funds are an ideal way to invest your money, especially if you want to invest in stock market but do not have knowledge or time to track daily activities. Mutual funds are a pool of funds professionally managed by market experts. Some of these funds also provide tax benefits while creating wealth for their investors in the long term.
But before you make a decision to buy a mutual fund, it is important to familiarize yourself with some Mutual fund terms that will be useful to you while understanding the inner workings of a mutual fund
Let us now understand each mutual fund term one by one.
- NAV: NAV stands for Net Asset Value. NAV is the value of per share of a mutual fund on a specific date and time. On every closing day, the total value of the mutual fund is calculated and is the divided by total number of units issued by the fund. The number thus arrived is called the Net Asset Value or the NAV of the fund.
- AUM: AUM stands for Asset Under Management. It is the total market value of the funds managed by the asset management company. AUM may vary with change in the flow of funds in and out of the mutual fund. AUM can also vary depending on the change in the market value of the assets managed by the fund.
- SIP: It’s the most popularly known mutual fund term. SIP or Systematic Investment Plan is a fixed amount of money that you chose to invest in a mutual fund regularly. SIP could be monthly, quarterly, or even yearly. SIP is one of the easiest ways to invest in stock market as it automates our investment process.
- AMC: An AMC or Asset Management Company is a company that invests your funds into securities that match financial objectives of the fund. AMC charge a fee is known as “Expense Ratio” in exchange of managing funds .The expense ratio is borne by mutual fund investors. Recently, market regulator SEBI has decided to decrease the expense ratio for AMC companies to make mutual investments more affordable for investors.
- SWP: This is a mutual fund term very little known to the investors. It’s just the opposite of SI. SWP stand for Systematic Withdrawal Plan. SWP is a service offered by mutual funds to allow investors to withdraw a specific amount of payout at predetermined period. The biggest advantage of SWP is that there is no tax on withdrawal of money from SWP plans.
- Expense Ratio: Expense Ratio is the cost of managing the fund divided by the number of units in that fund.These expenses include fee to registrar agent, fee charged by fund manager, custodian, legal and audit fee, and marketing expenses. SEBI has set a ceiling on such expense ratio. The expense ratio varies from each category of fund, for an equity mutual fund it cannot be more than 2.5% of the average weekly net asset, for debt funds the ceiling is 2.25% while for index funds it is capped at 1.25%. An investor must understand all the expenses of a mutual fund before making an investment decision.
- Lock In period: Lock in period is the time frame within which you cannot withdraw your money from the funds, this is done for tax saving purposes. Except ELSS(Equity linked Savings Scheme), no other mutual funds have a lock in period.
- Open end: An open ended fund is a fund with no restriction on how many units it can issue. It can issue unlimited number of units. Purchasing new units creates new ones while selling them takes them out of circulation.
- Closed End funds: Just the opposite of open ended fund. Close ended funds issue fixed number of units (NAV). What differentiates open ended funds from close ended ones is that close ended funds can be traded on the stock exchange just like normal shares.Close ended funds require broking and demat account to buy and sell its units.
- Asset Allocation: Asset allocation is how funds of a scheme are parked in various assets so as to maximize gains and minimize risk. Asset allocation is usually done in such a way so that the investment goals of the funds are met within stipulated time frame without taking too much risk.
Different funds have different asset allocations based on their principles and risk taking ability. For example, a debt fund will allocate most of its funds in debt instruments such as corporate bonds, Government bonds, Fixed deposits etc. On the other hand, an equity fund would allocate most of its assets in equities.
These were the most important mutual fund terms you must remember. I hope you found this post useful and knowledgeable, thank you for reading.