Mutual Fund Terms you Must Know
Mutual funds are an excellent investment option, where you have the flexibility to invest in different types of securities like 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.
Getting started with Mutual fund
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:
To make informed decisions as an investor, one must become familiar with the terms that are often used alongside mutual funds. Some of them are explained below:
AMC – Asset Management Company
AMC or 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. The AMC takes responsibility for collecting money from investors, investing the money in various funds, monitoring the funds’ performance and distributing the returns proportionately.
NAV – Net Asset Value
Net Asset Value or NAV is another common mutual fund terminology that defines the price of a Mutual fund unit. Just like the stocks have a share price, mutual funds have NAV. For example, 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.
SIP – Systematic Investment Plan
The Systematic Investment Plan or SIP is one of the most commonly used mutual fund terms. 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.
Today, investors 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 at the specific date. This helps you be disciplined with your investment.
STP – Systematic Transfer Plan
A 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 being exposed to high-risk, you can invest the amount in debt funds of the same fund house and choose STP.
When you do this, a predetermined amount will be transferred to an 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.
SWP – Systematic Withdrawal Plan
As the term suggests, SWP allows you to withdraw the accumulated funds over a period. Investors also use this as a source of pension after their retirement
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 predetermined amount at specified intervals.
AUM – Asset Under Management
AUM or Asset Under Management, 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
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
These are some of the frequently used terms while investing in mutual funds. It is important to understand their meaning and implications to achieve your financial goals and earn a good return on your investments.