Must Know Mutual Funds Investment Terms

Investing in mutual funds without the right knowledge, can lead to poor investment choices and financial losses in the long run. Therefore, as a beginner, it’s crucial to understand the basic mutual funds investment terms involved when starting your investment journey. Knowing these key terms is necessary to form a solid foundation for comprehending your investments better and making informed decisions.

The list below covers the most commonly used mutual fund terms that one must know to embark on the path of smart investing. These essential vocabulary words will empower you to navigate the world of mutual funds with confidence and clarity.

NAV, or Net Asset Value, is the price at which mutual fund shares are bought and sold. It represents the total value of the fund’s assets minus any liabilities, divided by the number of outstanding shares. In simpler terms, NAV tells you how much one unit of the mutual fund is worth at any given time. Understanding NAV is important because it helps you track the performance of your investment. A rising NAV indicates that the value of your investment is increasing, while a declining NAV may suggest that the fund is underperforming. Monitoring NAV allows you to make informed decisions about when to buy or sell your shares.

Assets Under Management (AUM) refers to the total market value of assets that a mutual fund manages on behalf of its investors. It includes all the money invested in the fund, giving you an idea of its size and popularity. In simple terms, AUM tells you how much money is being managed by the fund. Knowing the AUM is important because it can indicate the fund’s stability and credibility. A higher AUM often reflects investor confidence and trust in the fund’s management. Additionally, larger funds may have advantages such as better resources and access to a wider range of investment opportunities.

A Systematic Investment Plan (SIP) allows you to invest a fixed amount of money in a mutual fund at regular intervals, such as monthly or quarterly. This means you can invest small amounts over time rather than making a large lump-sum investment. In simple terms, SIP makes investing more manageable and less intimidating. SIP is important because it promotes disciplined investing and helps reduce the impact of market volatility through a strategy known as rupee cost averaging. By investing regularly, you can buy more units when prices are low and fewer units when prices are high, potentially leading to better long-term returns.

Capital gains are the profits you earn when you sell an investment for more than what you paid for it. If you buy mutual fund units at a lower price and sell them at a higher price, the difference is your capital gain. Capital gains are important because they represent the growth in your investments, contributing to your overall wealth. However, they are also subject to taxation, so understanding them helps in tax planning and maximizing your returns.

The corpus in a mutual fund context refers to the total amount of money that has been invested in the fund by all the investors combined. It’s essentially the fund’s pool of money that is used to make investments. A larger corpus indicates a more popular and possibly more stable mutual fund. It also allows the fund manager more flexibility in making investment decisions, which can potentially lead to better returns for investors.

Debt Funds are mutual funds that invest primarily in fixed-income securities like bonds, treasury bills, and other money market instruments. These funds aim to provide steady income with lower risk compared to equity funds. Debt funds are important for conservative investors who seek stable returns with lower risk. They are also useful for diversifying your investment portfolio, balancing the higher risks associated with equity investments.

Diversification in mutual funds means spreading your investments across different assets, sectors, or geographies to reduce risk. The idea is that if one investment underperforms, others may do well, balancing the overall portfolio. Diversification is crucial because it helps manage risk. By not putting all your eggs in one basket, you can protect your portfolio from significant losses if a particular investment doesn’t perform well.

ELSS stands for Equity Linked Savings Scheme, which is a type of mutual fund that invests primarily in equities and comes with tax benefits under Section 80C of the Income Tax Act. ELSS funds have a lock-in period of three years. ELSS funds are significant because they offer the dual benefit of potential high returns through equity investments and tax savings. They are a popular choice for investors looking to save on taxes while building wealth over the long term.

Entry Load is a fee that was charged when you buy units of a mutual fund. It was a percentage of your investment that was deducted before your money was invested in the fund. However, entry loads have been abolished in India since 2009. Understanding the concept of Entry Load is important from a historical perspective to appreciate how the mutual fund industry has evolved to become more investor-friendly. It also highlights the importance of being aware of fees that can impact your returns.

The Expense Ratio is the annual fee that a mutual fund charges its investors for managing the fund. This fee covers the cost of managing the fund, including administrative expenses, management fees, and other costs. The Expense Ratio is crucial because it directly impacts your returns. A lower expense ratio means more of your money stays invested, which can significantly affect your investment growth over time.

Exit Load is a fee charged by a mutual fund when you redeem (sell) your units before a specified period. It’s designed to discourage investors from exiting the fund too early, allowing the fund manager to invest with a long-term perspective. Exit Load is important because it can reduce your overall returns if you decide to sell your units early. Being aware of the exit load helps in planning your investments with a longer-term horizon to avoid unnecessary costs.

Thematic Funds are mutual funds that invest in a specific theme or sector, such as technology, healthcare, or renewable energy. These funds focus on companies that are expected to benefit from the chosen theme. Thematic Funds are important for investors who believe in the growth potential of a particular sector or trend. While they can offer high returns if the theme performs well, they also come with higher risk due to the concentrated exposure.

Learning these mutual fund terms is crucial for beginners in investment. As you continue to learn about mutual funds and their intricacies, you will build a solid foundation that will serve you well in your investment endeavors. Whether you are exploring mutual funds for the first time or looking to deepen your knowledge, being well-versed in these terms will help you make smarter investment choices and work towards achieving your financial aspirations.