Ever got confused with those technical words used by the Bankers, Wealth managers, or experts describing investments in news channels?
Investment in mutual funds can be quite confusing for investors as there are lots of jargon being used and many technical terms that are not easy for an investor to understand.
In this article, we would be listing down 13 most commonly used terms in mutual Funds –
1. AMC – Asset Management Company
Is the fund house or a company that manages investor’s money. Mutual funds are registered as trust under the Indian trust act. Mutual funds are initiated by a sponsor who alone or with a corporate establishes a mutual fund. The sponsor then appoints the AMC to manage the funds. E.g. HDFC is a sponsor who has appointed HDFC AMC to manage the funds.
2. AUM – Asset Under Management
Is the total of all investments being managed by the fund (fund’s AUM) or AMC (AMC’s AUM). It is the current value of total investment e.g. an equity fund which in 2017 had 1500cr as AUM but due to market returns the current value rose to 1650cr hence the current AUM of the fund would be 1650cr.
AUM also tells whether the fund is well accepted in the market or not.
A higher AUM signifies that there are more investors investing in that particular fund and the opportunity for the fund to invest is immense.
But a high AUM in a small-cap fund might pose a challenge for the fund managers to manage the money as the opportunities might be limited.
For example, a Large Cap Fund that invests in the top 100 listed companies has ample opportunity to deploy the funds as the companies have ample market capitalization to absorb these investments.
whereas in the case of small-cap fund where companies being invested have a small market capitalization have limited opportunity as there might not be enough such small companies available.
3. SIP – Systematic Investment Plan
Is a recurring investment on a periodic basis (weekly, fortnightly, or monthly) just like doing recurring deposits in the bank? A fixed amount is invested every month at a preset date.
SIP is a tool to average out the buying cost of the mutual fund.
Markets are volatile with upsides and regular corrections happening under such circumstances it is not possible to get the timing right every time one wants to invest,
SIP comes in handy in such situations wherein one can invest any amount (as low as Rs. 500) at a regular interval without being bothered about timing the market.
4. NAV – Nest Asset Value
NAV of a fund is calculated as Asset-Liability of the fund (including costs of the fund). NAV is the price that the investor has to pay to buy per unit of funds. A fund when it is introduced first time (called as New Fund Offer) starts with a NAV of Rs. 10 but with time it grows and hence at the current price the investor has to buy the current NAV.
5. Expense Ratio
Is the total expense that an investor has to incur while buying a mutual fund. It is charged as a percentage of NAV and includes administration fees, advertisement costs, sales and commissions to distributors, etc. There is two kinds of funds i.e. regular – with all the charges (involves intermediaries) and direct (which bypasses intermediaries) funds which are at a minimal cost. Since this cost has to be incurred by the investor himself, the aim should be to lower the cost as much as possible.
6. Exit Load
this is the fee that an investor has to pay when he chooses to exit the scheme. The objective of such fees is to avoid multiple exits from the scheme as well as to avoid early exits. Different mutual funds charge different exit loads and have different timelines as well.
7. Yield to Maturity (YTM)
The calculation of yield to maturity is a complex process but usually, it is defined as the rate of return that the bond will generate if it is held till maturity. This is an important parameter in determining whether to invest in the bond or not.
These are bottom lines or reference points against which the particular scheme of mutual funds is compared. It also outlines the broader objective and strategy of the fund. F0r e.g. HDFC’s top 100 fund is a large-cap fund benchmarked against the nifty large-cap index which means the universe for stock selection for this fund would be that of S&P BSE 500 and the performance of the fund will be correlated with the performance of the benchmark.
9. Closed-Ended Funds
This kind of Mutual Fund scheme limits the entry and exit of investors to the scheme but since they are listed on exchange one can exit them but this kind of funds are not very much liquid hence the restrictions apply.
Usually, these funds are launched with some specific theme and predefined time period of existence and it prohibits the sudden redemption pressure due to market volatility hence sticking to the theme becomes easier for these funds at the cost of liquidity.
10. SWP – Systematic Withdrawal Plan
allows investors to withdraw a predefined amount (variable or fixed) at a specified date or interval which can be yearly, quarterly, or monthly depending on the investor’s requirement. SWP provides an investor with a regular cash flow. A lot of investors opt for SWP against the dividend option for a regular cash flow.
11. STP – Systematic Transfer Plan
offers an option to invest a lump sum amount in a mutual fund (source fund) and do a systematic transfer to a different fund (target fund) on a periodic basis. These transfers usually happen from a debt scheme (liquid funds) to a targeted equity scheme (target fund) to negate the volatility of the market.
This deployment tool is a risk mitigation tool (to counter the volatility of the market) rather than a return maximization tool.
12. Turnover Ratio
Is the measurement of the holding in the mutual fund portfolio that has been replaced in a year. This varies with different funds, their objectives, and investment styles but usually, a high turnover ratio means higher trading on the portfolio and since every turnover implies a buying and selling of stock hence it will increase the cost and total expense ratio (TER) of the fund as well.
Is usually referred to as the fund manager’s performance. It is a measurement of the extra return that the fund is able to provide up and above the benchmark. It is one of the commonly used tools to understand the fund performance but usually, it is used in conjunction with other fund performance measurement tools.