Understanding Mutual Funds: Key Terms Explained

Investing in mutual funds can seem daunting due to the plethora of technical terms involved. Whether you’re a first-time investor or already have a portfolio, understanding these terms is crucial for managing your investments effectively. Below, we’ve simplified some essential mutual fund jargons to help you navigate the world of investing with confidence. See below for the Common Mutual Fund Terms You Must Know in detail.

Common Mutual Fund Terms You Must Know

1. Asset Management Company (AMC)

An AMC is responsible for managing the pooled funds from individual and institutional investors. It oversees the investment strategy, marketing, accounting, and other related activities to ensure the funds are managed efficiently.

2. Account Statement

This document provides a comprehensive overview of your mutual fund holdings, sent through email. It’s a valuable tool for tracking and monitoring the composition of your mutual fund portfolio.

3. Net Asset Value (NAV)

NAV represents the per-unit price of a mutual fund. It’s calculated based on the current market value of the fund’s assets minus liabilities, divided by the total number of units. NAV fluctuates with market conditions and is recalculated at the end of each trading day.

4. Assets Under Management (AUM)

AUM reflects the total market value of the assets an AMC manages across all its funds. It includes the sum of all investor capital minus any liabilities. The AUM can provide insights into the size and success of a mutual fund.

5. Systematic Investment Plan (SIP)

Contrary to common belief, SIP is not separate from mutual funds but a method of investing in them. It allows investors to contribute a fixed amount regularly, enabling the purchase of more units when prices are low and fewer when prices are high, effectively averaging the investment cost over time.

6. Systematic Transfer Plan (STP)

STP is a strategy for transferring a predetermined amount from one mutual fund to another within the same fund house. It’s often used by investors who wish to gradually move a lump sum investment from a low-risk fund to a higher-risk equity fund.

7. Systematic Withdrawal Plan (SWP)

The opposite of SIP, SWP enables investors to withdraw a fixed amount from their investment at regular intervals. This strategy involves redeeming units of the fund for cash, which is then transferred to the investor’s bank account.

8. Growth and Dividend Options

Mutual funds typically offer two investment options: growth and dividend. The growth option reinvests earnings back into the fund, while the dividend option pays out profits to investors. The choice between growth and dividend options depends on the investor’s financial goals and market conditions.

9. Asset Allocation

Asset allocation involves distributing investments across various asset classes like equities, debt, and commodities to diversify and mitigate risk. Each asset class reacts differently to market events, making diversification a key strategy for risk management. Hybrid mutual funds also consider asset allocation by investing in diverse assets.

By familiarizing yourself with these fundamental mutual fund terms, you can make more informed decisions and manage your investments more effectively.