You may encounter variety of short forms or important mutual fund terms while managing your mutual fund investments. Like every other industry, mutual fund sector also has its own lexicon. If you have less knowledge of these words, you might not understand the investment process or key elements in the mutual fund domain. So here is a chance to improve your mutual fund vocabulary!
Please note that we’re providing this glossary and definitions of key mutual fund terms for informational and educational purposes only. If you have specific questions on your investments, it is advisable to directly consult the financial planner!
“Asset Management Companies” (AMC) is one of the most used mutual fund terms in the mutual fund industry. AMCs are the companies which create a pool of investments from individual as well as institutional investors. AMC hires professional fund managers who take investment decisions on investor’s behalf and invest the pooled fund in variety of asset classes such as stock market, bonds, real estate etc depending upon the financial goals of the investors.
It is not just one of the mutual fund terms but Asset under Management (AUM) has been widely used in finance sector. The definition of AUM is simple; it is the total market value of the investments that a financial institution manages on behalf of its investors. Generally AUM includes the capital or pooled fund raised from investors as well as the capital belonging to the principals of the fund management companies or AMCs.
Systematic Investment Plan (SIP) is an investment technique or financial instrument offered by many mutual fund companies through which an investor can invest small amounts in mutual funds periodically instead of lump sums. SIP is also one of the most commonly used mutual fund terms. With the help of financial advisors, one can properly structure the SIP and set the investment frequency as fortnightly, monthly or quarterly depending on individual’s cash flow.
Systematic Withdrawal plan (SWP) is an investment facility offered by mutual funds where an investor can withdraw a certain amount of money (pre-determined) at regular intervals (pre-defined) from his or her mutual fund schemes. SWP is similar to SIP but it provides an option to generate regular income from your lump sum investment. SWP is also one of the widely used mutual fund terms in mutual fund industry.
Systematic Transfer Plan (STP) is an investment strategy where an investor regularly transfers a fixed amount of money from a Source scheme (usually debt fund) to Target scheme (usually an equity fund). One of the major differences in SIP and STP is the source of investment. In case of SIP, the money comes directly from investor’s bank account while in STP; money is transferred from a debt fund. STP is again a widely used mutual fund term in India.
NAV is one of the most important mutual fund terms in Mutual Fund investments. Net Asset Value (NAV) is simply the current market value of a mutual fund unit. This market value per fund unit determines the current overall cost of mutual fund. NAV is simply the price per share of the fund. Likewise shares have a share price; mutual funds have a net asset value. The performance of a particular scheme of a Mutual Fund is indicated by Net Asset Value (NAV)
The mutual fund term New Fund Offer (NFO) in mutual funds is similar to IPO (Initial Public Offering) in share market. It is an opportunity to subscribe to a particular scheme through limited period offer. Mutual fund companies offer investors to purchase mutual fund units within pre-defined offer period through an offer price. NFO investors usually generate good returns post listing.
A benchmark is a standard against which anything can be measured. Since 2012, SEBI made it compulsory for fund management companies to declare a benchmark index so that the performance of a mutual fund can be measured. Benchmark basically indicates whether the mutual fund has reached the committed target or not.
If the mutual fund scheme beats the benchmark, it is assumed that the scheme has done well. Majority of large-cap oriented equity funds benchmark themselves against the Sensex or the Nifty. Benchmark is again most common used mutual fund terms while evaluating the mutual fund performance.
Asset allocation is dividing your money to invest in range of asset classes (stock, gold, real estate, bonds etc) to get the best possible returns. The technique through which an investor can balance the risk through portfolio diversification is called asset allocation. In mutual fund investment, asset allocation is very important mutual fund term as fund managers take all asset allocation decisions and diversify your portfolio to reduce the risk.
Mutual fund companies usually collect some amount when they join or leave a particular mutual fund scheme. This fee is called load. There are two types of loads in mutual funds; entry load and exit load. The amount charged while entering a scheme is called entry load while the amount charged while leaving the scheme (redemption) is call exit load.
SEBI has discontinued the entry load since August 2009. Equity scheme exit load is 1% in case withdrawal is made within 12 months of investment date, on the other hand, there is not exit load if withdrawal is made after 12 months. However exit load varies from scheme to scheme for Debt Schemes.
These definitions will certainly help you to comprehend mutual funds investments in a better way and convert your investment decisions to “well informed” investment decisions.
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