Mutual funds are an excellent investment option, where you have the flexibility to invest in different types of funds and assets of your choice, including debt funds, equities, or gold. Expert fund managers manage mutual funds and allow the investor to build a robust corpus to meet their financial goals. Additionally, mutual funds are an excellent tax-saving investment option.
But, if you are an amateur investor before you start an investment, you must get familiar with the various mutual fund terms. This will help you make an informed investment decision. Some of the mutual funds' related terms you must know are explained below:
If you invest in mutual funds , you would inevitably hear about AMC. Asset Management Company is an institution that manages the funds of the investors. All AMCs must register themselves with SEBI, and they operate under the SEBI guidelines. The AMC can introduce several funds to meet the different objectives of the investors. It is responsible for managing your funds, they collect the money from different investors, invest the money in various funds, monitor the funds' performance and distribute the returns proportionally.
Net Asset Value or NAV is another common mutual fund terminology that you will come across when you talk about mutual fund investment. In simple language, NAV is the price of a mutual fund unit. Just like the stocks have a share price, mutual funds have NAV. So, if you are buying 100 units of a mutual fund, then you must buy it at the NAV.
The significance of NAV is that it acts as an indicator of the funds' performance over a period. If you track the NAV of the fund for a certain period, then you can gauge how the fund is performing and make an informed investment decision.
The SIP is one of the most commonly used mutual fund terms. Even a non-mutual fund investor would have heard of this term. SIP is essentially a method of investing in mutual funds wherein you can invest a small amount at periodic intervals (it can be weekly, monthly or quarterly). It is an excellent option for small investors like daily wage earners to get exposure to investing in mutual funds.
You can start a SIP with as little as Rs. 500 per month. Another significant feature of SIP is that it allows you to link your bank account to your investment account, and the pre-decided amount gets automatically deducted on the specific date. This helps you be disciplined with your investment.
Systematic Transfer plan gives you the flexibility to use the funds in a disciplined manner. For example, if you wish to invest Rs. 1 lakh in equity mutual funds, instead of investing the entire amount at once, and be exposed to high-risk, you can invest the amount in debt funds of the same fund house and choose STP.
So, when you do this, a pre-determined amount will be transferred to equity fund at a fixed interval (either weekly or monthly) as decided by you. Over a period, the full amount gets transferred to equity funds and thus safeguards your investment from market volatility. After specific years, if you feel that you have not earned enough returns from your investment in equity funds, you can again opt for STP and transfer the amount to debt funds.
If you invest in mutual funds, you must get familiarised with this mutual fund terminology . As the term suggests, SWP allows you to withdraw the accumulated funds over a period. You can also use the amount as a pension fund in your post-retirement life.
For example, if you start a SIP and invest Rs. 5000 per month for 30 years, your investment value would stand at Rs. 18 lakhs, and considering you earn 12% returns annually, the funds accumulated in your account would be approximately Rs. 1.5 crores. So, when you attain the retirement age, you can choose to withdraw a pre-determined amount at a pre-determined date.
AUM is another important mutual fund term that every investor must be familiar with. It indicates the total sum of investors and the size of the assets controlled by the AMC. The AUM of the fund keeps fluctuating through the day, due to the new investments made, and the redemptions that are done every day. It is one of the most important parameters that the investors must consider for judging the performance and credibility of the AMC.
Exit load is a mutual fund terminology used to denote the fees that the investors must pay when they exit from a mutual fund. Generally, the AMCs levy this charge to dissuade the investors from withdrawing their funds.
Apart from the term explained above, there are plenty of other mutual fund related terms that you must know. Knowing these terms will help you make better investment decisions and earn high returns.