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Mutual funds let investors pool money for expert-managed equity or debt investments. Key terms: NAV, AUM, benchmark, entry/exit load, expense ratio, growth vs. dividend options, direct vs. regular funds.
Key mutual funds you should know
Mutual funds are a great investment instrument that allows investors to pool their funds and invest in equities/debt under expert guidance. They are helpful for salaried employees who can commence a monthly SIP (Systematic Investment Plan) to invest in these mutual funds regularly without worrying about timing the market or constantly checking their investments.
Different kinds of mutual fund schemes cater to different demands. There are thematic and sectoral-wise mutual funds which invest in specific sector stocks. There are also half-debt and half-equity funds, and so on.
However, investors must understand some terminologies regarding mutual funds to make informed decisions. Precaution is better than cure, so to avoid losing your hard-earned money, let’s understand these terms.
Net Asset Value (NAV)
This represents the per-unit price of a mutual fund, calculated as: NAV = (Total Assets – Total Liabilities)/ Number of units
NAV changes every business day based on the fund’s asset value. Investors purchase or sell mutual fund units based on NAV.
Assets Under Management
This refers to the total assets minus total liabilities managed by the fund at a specific time.
Benchmark
Mutual fund performance should never be looked at in isolation. The performance of a mutual fund or any investment should be evaluated against a standard known as the benchmark. The benchmark for a fund is decided at its launch, and its selection is based on the investment objective of the fund.
This benchmark, comprising stocks, bonds, debentures, money market instruments, or other securities, indicates the kind of investment choices the fund will make as part of its stated investment objective. Hence, you, as an investor, should expect the scheme to perform better than its benchmark over a given time frame.
Entry Load & Exit Load
Entry Load: A fee charged when you invest in a mutual fund (now abolished in India).
Exit Load: A fee charged when you withdraw your investment before a certain period.
Expense Ratio
A mutual fund charges an annual fee for handling your investment, expressed as a percentage of assets under management (AUM).
Growth vs. Dividend Option
Some funds share profits as dividends at intervals, while others reinvest the profits, increasing NAV over time.
Direct vs. Regular Mutual Funds
Direct Fund: Bought directly from the Asset Management Company (AMC), lower expense ratio, higher returns.
Regular Fund: Bought through brokers, includes commission, higher expense ratio.