Mutual Funds Terms – Definitions and an overview in brief : As we already discussed on what is mutual funds, its definition and various types of mutual funds / schemes that you may choose among to invest in. Mutual fund is an investment fund in which money is pooled together from a number of investors. The fund is managed by professional fund manager who make use of his / her investment management skills to invest it is various securities such as stocks, bonds, money market instruments and other asset class .
Securities and Exchange Board of India (SEBI) is regulatory agency for securities market in India. If you are new to start investing in mutual funds then you are at right page. Through this article, you will be able to understand the meaning of some basic mutual funds terms .
Important 15 mutual funds terms to know about
AMC – Asset Management Company
AMC are the asset management companies that takes the investment decision for mutual fund / pooled funds from retail investors. AMC invest the funds into securities to meet the financial objective of its clients as specified in scheme related documents.
The companies earn income by charging service fees to their clients. These companies are registered with SEBI. Thus, AMC is primarily engaged in business of investing and management of portfolios of securities.
AUM – Assets Under Management
AUM (Asset under management) refer to total market value of investments being managed by financial firm , fund manager or AMC on behalf of its investors.
NAV – Net Asset Value
NAV also called Net Asset Value denotes the performance of a mutual fund scheme. Net Asset Value is the market value of the securities held by the scheme in portfolio after deducting liabilities. Like Share has a price, a mutual fund unit has an NAV.
NAV changes every day according to change in market rates of equity and bond markets.
Open ended fund
Open ended fund are available for purchase and sale at their prevailing NAV, that is decided on the close of every trading day. Unlike closed ended funds, these funds do not have any maturity period and are continuosly open for subscription and redemption.
Closed ended fund
These are funds or scheme in which investors invest their money for a specific period of time. Closed end funds have a fixed number of shares and are traded among investors on an exchange. Like stocks, price of these funds changes according to supply and demand, and they often trade at a wide discount or premium to their net asset value.
Corpus refers to total sum of money invested by all investors in a scheme.
Suppose, an investment fund has an initial investment of 500 units amd price of each unit is ₹10. So corpus of the fund will be (500*10)= ₹5000/-. Now other investors invest 5000. Now, What will be the corpus of the fund?
The total amount (5000+5000) is new corpus of the fund.
Custodian is an organization or bank who is responsible for safeguarding the investments and securities to mitigate the risk to loss or theft. Securities and assets are held in either electronic form or physical form.
Load is fee or commission charged to an investor on sale or purchase of units of mutual fund. There are two terms “Entry Load” and “Exit Load”. When you enter or buy into a new fund scheme , a percentage of the value is charged as commission. It is entry load. Similarly, when you exit the scheme or fund, you will have to pay exit load as penalty for early withdrawal. Load is calculated as percentage of NAV. For example, if the NAV is Rs. 100 and the entry load is 1%, the investor will enter the fund at Rs 101.
Some schemes do not charge any load or fees , they are called “no-load schemes”.
Portfolio / Holdings :
Portfolio is a combined grouping of financial assets such as stocks, bonds or other assets, as well as amount held in cash. Each investor in the fund owns shares, which represent a part of these holdings.
These holdings or portfolios are managed directly by investors or fund managers. You can diversify your portfolio by investing in different schemes / funds in an effort to minimize losses and maximize gains.
Sector Funds :
The funds which invest in securities of companies operating in specific industries or sector are called sector funds. Sector funds have more risk associated with them as there is lack of diversification. These funds take exposure in a single sector.
For examples – Pharma funds will have portfolios mainly comprising of different pharmaceutical companies. Banking Funds will have portfolio mainly comprising of different banks.
The funds invest both in equities and fixed income securities in the proportion indicated in offer documents with an aim to generate capital appreciation and regular income. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
NFO – New Fund Offer
NFO is first time subscription offer to a new scheme launched by companies. It is similar to Initial Public Offer (IPO). A New Fund Offer is launched by companies to raise capital from the public for further operations – purchase of securities like shares, bonds etc.
NFO are offered for a limited period. The investors can invest in these schemes at offer price which is generally fixed at Rs. 10 in most cases. Once the NFO period is over, investor can invest in the fund only at NAV prevailing at that time.
SIP – Systematic Investment Plan
SIP is a simple, flexible and hassle free way to invest your money in mutual funds. It allows you to make investment at a regular interval usually monthly or quarterly as per your convenience or investment objective.
Suppose you start investing monthly, your money is auto debited from your bank account and invested in mutual fund scheme you choose. Based on the NAV on that day, your portfolio will be allocated with certain number of units. When you will redeem these units, you will be paid at prevailing NAV on redemption date.
STP/SSP – Systematic Transfer Plan / Systematic Switch Plan
STP or SSP allows investors to switch periodically certain number of units from one scheme to another scheme. STP / SSP is helpful to ensure that your portfolio is unaffected by market volatility in short term.
SWP – Systematic Withdrawal Plan
Systematic Withdrawal Plan allows investors to withdraw a specified sum of money /units from portfolio account at a pre specified dates (monthly, quarterly, annually).
Hope you liked our article on important mutual funds related basic terms and got some basic knowledge about mutual funds terms .