Mutual funds come with their own unique set of terms and jargon that can sometimes seem like a foreign language to newcomers. Let’s demystify some of these terms:
1. Net Asset Value (NAV): NAV What is Net Asset Value (NAV), and how Does it Affect your Investment returns represents the per-unit market value of a mutual fund’s assets. It’s calculated by dividing the total value of all the fund’s assets by the number of outstanding units. NAV determines the price at which investors buy or redeem mutual fund units.
2. Exit Load : An exit load is a fee charged to investors when they redeem (sell) their mutual fund shares within a specified period after purchasing them. This fee is designed to encourage investors to stay invested.
3. Assets Under Management (AUM): AUM represents the total market value of all the assets (securities and investments) managed by a mutual fund. It indicates the fund’s size and can impact its liquidity and performance. In simpler terms, it’s the combined value of everything the mutual fund owns on behalf of its investors.
4. Systematic Investment Plan (SIP) : SIP is a disciplined approach to investing in mutual funds Risks Associated with Mutual Fund Investments. It involves regularly investing a fixed amount at predefined intervals (usually monthly) to take advantage of rupee cost averaging and the power of compounding.
SIP is a disciplined investment that lets investors buy more units when prices are low and fewer shares when prices are high. As a result, the cost of investments gets averaged out over the long term.
Rupee cost averaging encourages investors to focus on their long-term financial goals rather than attempting to time the market. It instils discipline, minimises emotional reactions to market fluctuations, and can lead to the accumulation of more units at a lower average cost.
5. Benchmark Index: A benchmark index is a reference point used to assess the performance of a mutual fund. It represents a specific market or asset class and helps investors compare how a fund is doing relative to the broader market.
6. Returns : Returns refer to the gains or losses generated by a mutual fund’s investments 8 Proven Strategies of Successful Mutual Fund Investors over a specific period. Returns are typically expressed as a percentage and are a crucial factor for evaluating the performance of a mutual fund.
7. New Fund Offer (NFO) : An NFO is the initial offering of a mutual fund scheme to the public. During an NFO, investors can subscribe to the fund for the first time. It’s an opportunity to get in on the ground floor of a new fund.
8. Compounding : Compounding is the process where the returns generated by an investment are reinvested, leading to the exponential growth of the investment over time. It’s often referred to as “interest on interest” and can significantly boost the value of your mutual fund investments.
9. Portfolio : A mutual fund’s portfolio is the collection of securities and investments it holds. It includes stocks, bonds, and other assets chosen to align with the fund’s investment objectives and strategies.
These terms provide a foundation for understanding mutual funds and navigating the world of investing. Familiarising yourself with these concepts can help you make more informed decisions when choosing and managing your mutual fund investments.
