19 must know terms in mutual funds
Here is a list of 19 Must know terms in Mutual funds for all beginners:
AMC (Asset Management Company):
These are financial institutions that manage your mutual funds. They decide when and where to invest your money in line with your investment goals. Examples of AMC are HDFC Mutual funds, SBI Mutual fund.
Assets under management:
Asset under management is the total amount of money that all investors have put in a fund. Most mutual fund companies manage crores of rupees.
Funds:
These are individual scheme with specific goals and investors accordingly invest in them keeping in mind their investment objective. For e.g. HDFC Equity fund, Sundaram selects mid cap funds etc.
Corpus:
This is the total amount that you have invested in a fund. Let’s say you have bought 10 units of a fund worth Rs 200. Then your total invested fund is Rs 2000, which is referred to as your corpus.
Expense ratio:
It is the annual fee charged by the mutual fund company to manage your money. Expense ratio includes the fund manager’s fee and other administrative and distributions fees. Expense ratio is usually 1.5%-2.5%
Entry load:
Entry load was the initial fee that you paid when you bought the mutual fund. However SEBI has done away with charging entry load for mutual funds.
Exit load:
Mutual fund companies charge an exit load if the investor sells his investment before a specific time period. So let’s say your value is Rs 10000 and exit load is 1%, you would get Rs 9,900 in hand after deduction of exit load. Exit load is imposed to discourage early/premature withdraws by investors.
Redemption:
Redemption is when you sell your mutual funds and receive cash back.
Lock in period:
Lock in period is a time period where you cannot withdraw your investment for a specific period. In mutual fund investing it typically applies to tax saving mutual funds like ELSS, where you have a lock in period of 3 years.
NFO
New fund offer (NFO) is a term given to a mutual fund which is recently launched.
Portfolio:
A portfolio is like a collection of various financial assets in which investments have been made. For e.g. If you have 1 Lakh Rs and invest them in 10 stocks, buy some mutual funds, invest in debt market. The entire investments would be part of your portfolio.
Systematic investment plan (SIP):
SIP is a periodic investment in mutual funds. An investor can invest a fixed amount of money on a regular basis (it can be monthly, quarterly or every 6 month). This creates among investors a habit of discipline investing.
Benchmark index:
In order to know how our investments have performed we compare them to a benchmark. The benchmark is usually an index like Sensex and Nifty. For eg: If Nifty has given a return of 15% and your investments have given a return of 18%, you have outperformed the benchmark by 3%. Similarly, if Nifty gives a return of 15% and your investments give a return of 12%, you have underperformed the benchmark.
Rupee cost averaging:
Rupee average costing is a concept of averaging the cost at which you buy your mutual funds/share by periodic investments.
Holding period:
Holding period is the duration for which a security is held by an individual. Let’s say if you bought a mutual fund on 1/1/19 and held it till 1/1/22, your holding period would be 3 years.
Fund manager:
Fund manager is the professional who handles the mutual funds along with his team of experts. All decisions regarding the fund is taken by the fund manager.
Distributor:
An individual or corporation which sells mutual fund schemes to investors on behalf of mutual fund companies. A distributor earns commission for bringing in investors into the mutual fund scheme.
CRISIL rating:
CRISIL is a company which ranks various financial assets in the country. It also ranks mutual funds based on its analysis and research. A higher rating is definitely better.
CAGR (Compounded Annual Growth):
Compounded annual growth rate is the return of your fund per year. It assumes that the profits are put back into the fund. This is not simple interest but compound interest.