Do terms like Expense Ratio and Exit Load make it complicated for you to invest in mutual funds? Do you get confused between AMC and AUM? Here’s a glossary of mutual fund terms that you must get acquainted with, to choose the right investment plan.
Mutual funds are one of those investment avenues that can cater to the needs of a wide spectrum of people. Whether you aim at wealth generation, low-risk savings, or are looking out for alternatives to bank deposits, SEBI has allowed various categories of mutual funds to function in order to address investor demands. However, navigating the terms associated with mutual funds can be daunting, even though it is jargon every smart investor must know.
Here are the mutual fund terms every investor must know:
Asset Management Company (AMC)
This refers to the fund house that manages various fund schemes. It looks upon management, accounting, marketing, and investment pathways. Investors’ wealth is invested professionally in various stocks by mutual fund managers and returns are distributed proportionately. A single AMC can introduce various schemes of different categories and investment objectives. For example, Aditya Birla Sun Life, Mirae, ICICI Prudential are all AMCs that have come up with numerous schemes.
The AMC name helps in trust building, as a registered fund house is authentic, and known for its proven track record of giving good returns to investors. All these fund houses need to be registered with SEBI.
Assets Under Management (AUM)
This refers to the total assets that an AMC is actually managing for its investors. The assets or corpus amount pooled in through various fund schemes from the investors is the total AUM of an AMC. It fluctuates on a daily basis as new investors and redemptions take place.
Larger AUM means more clients have invested their money with the AMC and that indicates trust with the fund house. It helps in further building the investor base.
Net Asset Value (NAV)
This refers to the price per unit/share of a mutual fund. In a layman’s term, stocks have share prices, mutual funds have NAVs. Total Assets of a fund divided by its number of outstanding units defines the NAV of a fund. This indicates the performance of a MF scheme over a duration of time. A higher NAV usually means better performance of a fund.
However, a fund’s performance is not based on absolute measurement of NAV itself. Relative growth of a plan over a period of time must be gauged along with the NAV to judge its performance. Computing only NAV of a specific duration may not be fair.
Load (Entry & Exit)
Loads are basically of two types: Entry & Exit. While Entry Load is the charge for administration and operation of the fund collected at the time of beginning the investment, Exit Load are costs of these operational expenses charged at the time of redemption.
There are some schemes that do not charge these costs, known as No-Load Funds (and vice-versa, there are Load Funds for the fund plans that bear these costs).
Expense Ratio is an annual fee charged for the management of a mutual fund scheme by a fund house. It is usually in percentage and is one of the most important costs incurred in a MF scheme. It includes management costs, compliance costs, shareholder service costs, and also the entry/exit loads. No-Load Mutual Funds have lower Expense Ratio than Load Funds as the latter has charges for selling off the units that usually involve third parties and commission is paid to these intermediaries. No-Load Funds’ bidding is done by the fundhouse itself.
Also, a regular plan of a fund scheme carries higher Expense Ratio than its direct plan counterpart as investment is done through a broker in regular plans who are paid commission for the same.
You must have noticed all advertisements related to Mutual Funds carry a disclaimer that Mutual Funds are subject to market risks. No MF is entirely free from it. However, there are funds with high and low risks, as well as high and low returns to suit the risk appetite and requirements of various investors. For instance, Equity Funds have a high risk-return ratio i.e, will generate high returns but also bear more risks in comparison to debt funds. Some funds like Large Cap Equity Funds are comparatively safer, which means high returns and relatively lower risks than other category equity funds.
Systematic Investment Plan (SIP)
One of the most common FAQs is what’s the difference or what’s better between SIP and a mutual fund. Truth is, SIP itself is a mutual fund plan and no different from it — SIP is just a new investment route. You can put in your money in a lump sum at once in a fund scheme or keep investing smaller amounts periodically over a tenure.
You can say it’s an investment type that’s equivalent to a Recurring Deposit (RDs). It is suggested one opts for an SIP as it’s light on pocket, helps develop a discipline of investing, and balances risks and returns.
Systematic Withdrawal Plan (SWP)
It is the SIP equivalent of redeeming the plan — selling the units and taking back the money. Instead of all units being sold at once and you receiving a lump amount of the invested money plus returns, your units are periodically and uniformly sold and you get paid accordingly.
Systematic Transfer Plan (STP)
STP is a plan in which you can transfer a predetermined amount from one fund scheme to another, provided both are from the same fund house/AMC. It’s similar to SIP, with the only difference that you transfer a certain amount from the bank to a scheme in SIP, while in STP, you transfer from a scheme where you had already invested to a new one.
This is usually done from a debt to an equity fund, when you have a lot to invest but are too hesitant to put it all in an equity fund that bears the higher risks. You can invest in a low-risk debt fund and ask the AMC to transfer a certain amount to an equity fund scheme at regular intervals that can give you higher returns and help in capital generation.
Rupee Cost Averaging
It is a term that is associated mostly with SIPs. When money is invested in periodic intervals, more units of a scheme can be purchased when its prices are low and less when high. This in turn averages the costs of units and lessens the short-term market fluctuations on the investment.
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