Living in a growth-driven environment, you may have come across the term mutual funds and wondered what are mutual funds? Mutual funds are professionally managed investments where the investor chooses to invest in stocks, bonds, cash, or any other form of asset and earn a return over a period. These security types are called holdings which combine to form a mutual fund or also commonly called portfolio. Simply put mutual funds are similar to baskets. Each basket holds hundreds of securities such as stocks or bonds. Therefore, when an investor buys a mutual fund, he doesn’t own the securities but has some shares in mutual funds and not the holding/security.
What are mutual funds, common terminologies, and what they mean? Image Source: business-standard.com
When a layman decides to invest somewhere, he should know what are mutual funds and how they work; for instance, you can check out https://scripbox.com/mf/ and find out more. One may come across various terms and jargon that are difficult to understand. Below are some commonly used terms which help in understanding what are mutual funds and how can they be used optimally.
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Net Asset Value (NAV)
It is the market value of a single unit or price per share of a mutual fund. This is the price at which the unit of a mutual fund is purchased. The NAV of a fund remains the same throughout the day and is calculated at the end of each trading day. NAV indicates the fund’s performance over a period. By tracking the NAV of a fund, it is easier to predict future performance and make an investment decision. The relative growth of any fund should be used to make a decision rather than absolute numbers.
Asset Management Company (AMC)
As the name suggests, AMC is the company that manages the funds of an individual and pool that money to invest in various assets and manages the overall funds. The AMC manages the investment, marketing, accounting, and any other functionalities concerning the fund. In India, it is compulsory for an AMC to get themselves registered with SEBI.
Systematic Investment Plan (SIP)
This is the process of investing in a systematic financial plan on a monthly basis in small and periodic investments. This helps the investor to reduce the risk of buying anything in bulk. The pre-defined monthly payments keep the investments dynamic in nature and close to the hassle of the market. The plan comes with a flexible amount as low as Rs. 500 that can be invested every month.
Asset Under Management (AUM)
AUM represents the total market value of investments that are being controlled by AMC for investors. These funds are used to transact or buy bonds, or shares for the clients/investors. Once the funds have been handed over to AMC, they have complete control over each transaction. The AUM fluctuates on a regular basis because of constant fresh investments and redemptions on a daily basis. High AUM reflects the trust of investors and good management by AMC.
The exit load is a penalty or commission charged if an investor decides to pull back or cash in the mutual fund before the lock-in period. It is calculated based on the NAV of the fund at the time of redemption. Charging an exit load varies among different funds, some funds have zero exit charge.
An expense ratio is an annual fee that is a percentage of your investment that the AMC charges for managing and operating the fund by providing their professional expertise. This money/percentage ratio is automatically deducted from the investments and investor doesn’t receive any form of a bill for the same.
The above-mentioned terms will help understand mutual funds better. Enabling first-time investors to not just make a decision but a well-informed decision!