10 Terms You Should Know About Mutual Funds
Are you afraid of investing in mutual because of the technical jargons? Or have you invested in mutual funds but don’t know about the terms associated with mutual fund investing?Don’t worry. In this article, we will go through some important terms or jargons associated with mutual fund investing that you should know.
1.Asset management company:
Asset Management Company is the company that manages money of individuals and institutional investors on their behalf. The asset management company manages the investment and takes care of the other related activities like marketing, accounting, etc.
Account statement gives a consolidated view of your mutual fund holdings through email. If you have invested in mutual funds, the account statement will help you track and monitor your mutual fund portfolio composition easily.
3.Net asset value (NAV)
A mutual fund comprises many units. When you invest in mutual funds, the fund house will allot you certain units based on your investment amount and current market scenario. Net Asset Value (NAV) isthe unit price of the mutual fund unit. The NAV depends on the value of the underlying securities and the total number of units of the fund. All fund houses calculate the NAV of funds at the end of the trading day.
4.Assets under Management (AUM)
Assets under management (AUM) is the total size of the assets managed by AMCs. It is the sum of the total assets held by the fund minus the liabilities. The AUM of the fund depends on the underlying value of the assets and inflows from investors.
5.SystematicInvestment Plan (SIP)
Systematic Investment Plan (SIP) is the most common mutual fund term. However, many people and investors believe that mutual funds and SIP are two distinct entities and believe that investing in mutual funds is riskier than SIP. It is not true. SIP is a way/route to invest in mutual funds systematically and invest a predetermined amount of money at regular intervals. SIP builds discipline in your investing journey. As you invest a fixed amount of money every month, fund houses allocate more units when the market is down and vice versa. As a result, SIP averages out your investment cost.
6.Systematic Transfer Plan (STP)
Similar to SIP, Systematic Transfer Plan (STP) is a systematic way where investors can transfer predetermined amount from one fund to another fund of the same mutual fund house. If you have a lump sum amount to invest but don’t want to invest the entire amount in an equity fund, you can park the money in a liquid fund and set up a STP of a certain amount that will be transferred to an equity fund of your choice.
7.Systematic Withdrawal Plan (SWP)
Systematic Withdrawal Plan is the opposite of SIP. SWP allows investors to withdraw a predetermined amount at regular intervals from their earlier investments. In this process, the units are redeemed, and the amount is credited to the investor’s bank account.
8.Growth and dividend option
Many mutual fundsoffer two options: growth and dividend option. In growth option, the fund reinvests its profits and bonuses. However, in the dividend option, the fund distributes the profits to their investors. However, the distribution of profits is not fixed. It depends on various aspects such as market conditions and the decision of the management.
Asset allocation is the mix of different assets such as equities, debt and commodities. It helps to diversify and reduce the risk associated with your portfolio. It is because asset classes react differently to the same news or events. You can diversify your overall portfolio by investing in different asset classes. Hybrid mutual fund also takes care of asset allocation by investing in unique assets.
All funds must have a benchmark index. The benchmark acts as a performance yardstick. It helps us to measure the performance of the fund. The benchmark is a market index such as BSE Sensex or NSE Nifty. The benchmark will depend on the type and nature of the fund. The aim of the fund manager is to beat the benchmark index.
Conclusion:There are many more terms associated with mutual fund investing. These were the ten key terms associated with mutual fund investing that can help you understand the various nuances of investing in mutual funds.
This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.