A mutual fund is a pool of money managed by a professional fund manager.
It collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s ‘Net Asset Value’ or NAV.
In other words, the money pooled in by a large number of investors is what makes up a Mutual Fund.
If you look at the definition of mutual funds, there are some key words which have been mentioned to make you understand the meaning. However, what is the meaning of such words, like fund manager or NAV?
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Here’s a short compilation of some of the mutual fund terms, which you will see more often when you invest in them.
Net Asset Value
Net Asset Value (NAV) represents a fund’s per-share intrinsic value. It is important to understand the performance of a particular scheme of a mutual fund. As an investor, after investment in a mutual fund, you will be issued units.
You will then become a unit-holder. This is akin to a shareholding buying stocks.
Asset Management Company
Asset Management Company (AMC) is the investment manager of the Mutual Fund that manages the pool of investor money on behalf of the investors. An AMC carries out all purchase and sale of securities in the portfolio of various schemes launched by the Mutual Fund.
Fund House
Fund house is just another name for an Asset Management Company (AMC). Fund house is used more commonly by people when they are referring to an AMC. Fund house and AMC can be used interchangeably.
The fund house provides professional investment management services to its investors, by hiring fund managers to manage the pool of investor money on behalf of the investors
Mutual Fund Units
Mutual Fund Units are in a way like shares of a company that trade in the market and represent the extent of ownership you have in the mutual fund as an investor.
The amount of money you invest in a fund decides the number of units of the fund you would be allotted, and these units represent the extent of your ownership in the pool of money managed by the fund on behalf of all its investors.
The number of units allotted to an investor depends on the money invested by the investor and the applicable NAV.
CAGR
CAGR or Compounded Annual Growth Rate, is annualised returns on a mutual fund. Concept of compounding will help to understand CAGR.
Compounding
When you invest in a financial asset, you earn on the amount invested. You earn some amount on your existing profits, either through investment returns or from interest accrued.
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In other words, also known as ‘interest on interest’, it refers to the interest accrued on the initial deposit (principal) including all of the accumulated interest.
Depreciation
Depreciation is the decline in your investment’s value in the mutual fund. This means, you will make a loss when you sell the mutual fund units.
Diversification
Diversification is one of the key benefits as well as characteristic of a mutual fund. It is the practice of investing in different types of securities or asset classes.
Expense Ratio
Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to charge certain operating expenses for managing a mutual fund scheme, such as sales, administrative expenses, transaction costs etc., as a percentage of the fund’s daily net assets.
All such costs for running and managing a mutual fund scheme are collectively referred to as ‘Total Expense Ratio’ (TER). The TER is calculated as a percentage of the Scheme’s average Net Asset Value (NAV).
The daily NAV of a mutual fund is disclosed after deducting the expenses.
Exit Load
Some Mutual Fund schemes charge an exit load on redemptions or cancellation within a stipulated time period.
Exit load is like a penalty for premature redemptions because it is meant to discourage investors from selling their Mutual Fund investments too soon.
Assets Under Management
Assets Under Management (AUM) is the total market value of the investments (assets) that an asset management company is managing, on behalf of its investors.
Close-Ended Schemes
Investors can buy units in Close-Ended Mutual Fund schemes from the fund house only during the NFO (New Fund Offer) period.
New Fund Offer (NFO)
New Fund Offer is like an IPO (Initial Public Offering) except that, IPO is marketed by a company trying to go public while NFO is marketed by a Mutual Fund trying to launch a new scheme. When a Mutual Fund wishes to launch a new scheme in the market, it does so by way of an NFO.
Systematic Transfer Plan
A Systematic Transfer Plan (STP) allows you to transfer a fixed number of units or amount from your investment in one Mutual Fund scheme to another scheme managed by the same fund house on a prespecified day every month.
Systematic Investment Plan
A Systematic Investment Plan (SIP) is a facility offered by Mutual Funds to the investors to invest in a disciplined manner. It allows an investor to invest a fixed amount of money at predefined intervals in the selected mutual fund scheme.
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