Mutual Fund Terms You Need to Know

Are you confused by the jargon used in mutual funds and unsure how to navigate investing in them? Mutual funds can be an ideal investment option for those seeking a diversified portfolio without having to purchase and manage individual securities. Still, it is important to understand the different terms that may confuse new investors. In this article, we will discuss the definition of key terms associated with mutual funds, so you can make informed decisions when investing and build a more stable investment portfolio over time.

1. AMC - Asset Management Company

An AMC is a financial institution that manages and invests funds on behalf of clients such as individuals, corporations, and other institutions. The clients entrust their funds to the AMC, which then invests the money in various financial products, such as stocks, bonds, and other securities, to fulfill the fund's investment objectives.

SEBI regulates AMCs and must comply with strict rules and regulations related to their operations, disclosures, and transparency. The main goal of an AMC is to generate returns for its clients while minimizing risk and providing them with professional investment management services.

2. NAV - Net Asset Value

It is a common mutual fund term that refers to the price of each unit of a mutual fund. Just like stocks have a share price, mutual funds have NAV. For example, if you purchase 100 mutual fund units, you must purchase them at the NAV.  

The NAV of a mutual fund represents the total value of the fund's portfolio divided by the number of shares outstanding. It is calculated at the end of the trading day. 

NAV is the indicator of the fund's performance over a period. If you track the NAV of a fund for a certain period, you can gauge the fund's performance and likewise make an informed decision. 

3. SIP - Systematic Investment Plan

SIP is a popular and effective method of investing in mutual funds. Investors make regular and periodic investments in a fund over a period instead of investing a lump sum amount in one go. 

Under a SIP, an investor agrees to invest a fixed amount at regular intervals, usually weekly, monthly, or quarterly, in a chosen mutual fund scheme. The invested amount is deducted automatically from the investor's bank account on a specified date every month. The units are allocated at the scheme's prevailing Net Asset Value (NAV) on that day. This way, the investor can invest in a disciplined manner, regardless of market conditions.

SIPs are considered a convenient and affordable way to invest in mutual funds, as they allow investors to start with a small amount, as low as Rs. 500. This makes mutual fund investments accessible to a wider range of people who may not have large sums of money to invest in one go.

4. STP - Systematic Transfer Plan

STP is an investment strategy used in mutual funds that gives you the facility to use funds in a disciplined manner. An STP is useful when an investor wants to move funds from a more volatile fund to a less risky fund or vice versa. For example, an investor may want to transfer funds from an equity fund to a debt fund over a period to reduce the risk in the portfolio.

Under an STP, the investor specifies the amount to be transferred, the frequency of the transfer, and the mutual fund schemes involved. The transfer is usually done automatically from the redemption proceeds of the source scheme to the purchase of units in the target scheme.

STPs can be customized according to the investor's needs and preferences, and most mutual fund companies offer them.

5. SWP – Systematic Withdrawal Plan

SWP allows investors to withdraw a fixed amount from a mutual fund scheme over a period. This is a helpful strategy for those who want to generate regular income from their mutual fund investments or those who need to manage their cash flow. The SWP can be set up for a specific period or an ongoing process until the investor stops it.

Investors also use this as a source of regular income after retirement. It can be customized according to the investor's needs and preferences and is offered by most mutual fund companies.

6. AUM – Asset Under Management

AUM is an important metric for investment companies, as it indicates the size and scale of their business. It is a financial term that refers to the total market value of the assets an investment company or financial institution manages on behalf of its clients. The higher the AUM, the more assets the company manages on behalf of its clients and the more revenue it generates through management fees.

AUM is also a key performance indicator for investors, as a fund with a higher AUM also signals that investors in large numbers are investing in the fund. This is especially true for equity funds, as individual investors typically invest in these funds.

7. Expense ratio

The cost of owning a fund over a year is expressed as an expense ratio. It covers expenses related to managing the fund, promotion, advertising, and other related expenses. The market regulator has specified a range of expense ratios that funds of different categories can charge from their investors.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.