20 Must Know Mutual Fund Terminologies Every Investor Should Know

From witnessing a stock market crash in March 2020 to booming to all time highs in October 2021, the stock market in India has been the talk of the town. Besides this, there has been rising awareness and eagerness amongst investors to unlock the immense potential that the ¡®all in one¡¯ investment instrument in the form of mutual fund holds. This has been evident from the significant jumps in number of mutual fund investors added and the assets under management for mutual fund houses, which rose 12% in FY 2020-21 vs FY 2019-20 and doubled in the past five years, from Sept¡¯ 2016 to Sept¡¯ 2021, respectively.

So what makes mutual funds a lucrative investment vehicle for so many investors? It is because mutual funds not only have something to offer for varying risk appetites and investment horizons of different investors, but even their returns tend to mostly outperform the sub-optimal returns of fixed income instruments like Bank FD or PPF by good enough margins, especially over the long term, after factoring in factors like inflation and taxation.

If you are amongst those contemplating to invest in mutual funds but tend to restrain due to lack of understanding and knowledge, let¡¯s try and understand some of the must know mutual fund terminologies which can help you to step into this investment vehicle and even assist existing investors to grow their wealth.

1. Net Asset Value (NAV)

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NAV the per-unit value or per-unit price of a particular mutual fund scheme. It is the price at which the units of that fund are purchased/ sold and is derived by dividing the AUM with the number of units issued by the fund. The change in NAV over a period tells you the fund¡¯s gain or loss and how it is performing. When the current NAV of your fund is higher than the one at which you bought it, then it is performing well and you are in profit, and vice versa.

2. Expense Ratio

Expense ratio represents the percentage of fund's assets that is paid out in expenses in relation to running/operating the fund annually. These expenses may include administration expenses, fund management or advertising related expenses, audit fees, insurance premium paid by the fund. Total expense ratio= (Total expenses during an accounting period) * 100 / Total net assets of the fund.

3. Assets Under Management (AUM)

AUM is the total market value of the investments (assets like shares, gold, cash,bonds etc) that an asset management company is managing on behalf of its investors. It is basically the total of NAV (on that particular day) multiplied with the total number of units. A mutual fund with a big AUM size can have two implications- either a good performance by the fund or just the presence of a large number of investors in that fund.

4. Asset Management Company (AMC)

Registered under SEBI, an AMC is a firm that manages the investor¡¯s money, by carrying out all purchase and sale of the portfolio¡¯s securities in the portfolio of various mutual fund schemes.

5. Systematic Investment Plan (SIP)

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SIP is a mode/route of investing in mutual funds which involves investment of a fixed sum at regular intervals in a mutual fund scheme. It allows the investor to buy units of the fund/scheme on a predetermined date on periodic intervals like weekly, monthly, quarterly etc.Investing through SIPs ensures one remains invested in both the bullish and bearish market conditions and does not have to time the market.

Also Read: Worth Explains- How to Kickstart Your Investment Journey With No Prior Experience

6. Systematic Transfer Plan (STP)

STP is a strategy/facility that allows an investor to instruct the fund to transfer a certain amount from one scheme to another scheme of an AMC, at regular intervals.

7. Withdrawal Plan (SWP)

As the name suggests, SWP is a facility/strategy that enables investors from accumulated funds, to withdraw a fixed amount at regular intervals , like monthly, bi-monthly, quarterly etc.

8. Asset allocation

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Asset allocation is the process/strategy of diversifying your investment portfolio across various asset categories such as equity, bonds, cash, gold etc, as per his/her risk appetite, financial goals, income, lifestyle,age etc.An efficient asset allocation strategy steadies the ship for the investor in both bullish and bearish market conditions, and is usually aimed to minimize volatility and maximize returns from the investment portfolio.

9. Bonds

Bonds are fixed income financial instruments that bear a promise of paying the interest to the investor (also known as lenders). These are debt securities issued by government, corporations or other organizations, and sold to investors, with the obligation to pay them back a specified sum of money due on the maturity date in the future.

Also Read: Frequently (Not) Asked Questions - How Much Tax Am I Paying On My Mutual Fund Investment?

10. Bear Market

The period in which the market corrections happen continuously as the investors/market participants are on a selling spree. This activity results in a declining share price over a stretched period.

11. Bull Market

The period during which the price of stock keeps rising, and investors/participants are on a continuous buying spree. The period generally results in a rising price for the shares.

12. Benchmark

Benchmarks are the parameters against which you can compare your mutual fund schemes¡¯ returns to check its performance. Typical benchmarks are indices like Sensex and Nifty. Ideally, a mutual fund scheme outperforming its benchmark index indicates a good performance.

13. New Fund Offer (NFO)

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New Fund Offer occurs when a mutual fund company offers a first time subscription of its new scheme, aimed to raise capital for purchasing securities. It is a limited period offer put forth the public at relatively cheaper rates than the existing funds, as the scheme is new to the market and aims to attract investors in order to raise funds.

14. Capital Gains

Capital gains are the profit realized upon the sale of securities, and other capital assets such as mutual fund units. These gains are classified as short-term capital gain or long-term capital gain depending on the period of holding the instrument invested in. For instance, debt fund investments redeemed within 3 years of holding are termed as short term, whereas equity fund investments redeemed within 1 year of holding are termed as short term. Based on the holding period, applicable capital gains tax is levied on the investments redeemed.

15. Debt Funds

Debt funds are a type of mutual funds that invest in fixed income securities such as corporate bonds, treasury bills, commercial papers, government securities, and numerous other money market instruments. Each of these instruments involve a pre-decided maturity date as well as interest rate which the investor can earn on maturity.

Also Read: Debt Funds vs FD - Which Is The Best Investment Option?

16. Equity Mutual Funds

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Equity mutual funds are funds that predominantly invest in the shares of different companies. Funds that invest at least 65% of their total asset into equity or equity-oriented securities, are deemed as equity-oriented funds. Categories/Types of Equity funds include Large cap funds, mid cap funds, multi cap funds, small cap funds etc.

17. Exit Load

Exit load is the charge/fee levied by a fund house when an investor redeems the investment from that fund. Paying an exit load lowers the NAV, as it commonly expressed as a percentage of NAV, like 1% of NAV. The primary reason for fund houses to levy exit load is to discourage investors from backing out and pulling out their investments,especially before the lock-in period is over.

18. Liquid Funds

These funds invest predominantly in short-term fixed income money market instruments like commercial paper, treasury bills, certificates of deposit etc.which have residual maturity of upto 91 days, hence providing high degree of liquidity.

19. Lock-In Period

This is the period during which the investor is not allowed to redeem/sell their investment.For example, as ELSS involved lock in period of 3 years, if you had invested in an ELSS on 1st February 2020, you cannot redeem it until 1st February 2023, ie. until the completion of lock in period of three years.

20. Cut-off Time

Cut-off time is the time before which any transaction made by an investor in that fund is executed the same day as per that day¡¯s NAV. The trades placed post-cut-off time are completed the next day at the next day¡¯s NAV. Primary implication of cut off time is to determine the applicable NAV for that mutual fund transaction.

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