1                          Basic Terms Used in Mutual Fund

1.1          Asset Management Company (AMC) & Asset Under Management (AUM)

AMC is an abbreviation of Asset Management Company and is formed as a trust in India. In general, AMCs are the firms that pool money from various investors to invest in various stocks, bonds, Government securities, commodities, etc.

The AMC manages some funds through its fund managers and this asset or money is known as Asset Under Management or in short AUM.

-          For Example, ICICI Prudential Blue-chip Fund is an AMC, and the asset value of Rs. 30, 000 Cr is the AUC.

1.2          Fund Managers

Fund managers are financial experts who are responsible for managing the assets of mutual funds. The track record of mutual fund managers matters thus suitable research on funds and fund managers is required before investing in a mutual fund.

1.3          Terms SIP, SWP, and STP

The term SIP refers to a Systematic Investment Plan which is an investment tool that allows investors to invest a fixed amount at a regular interval of time in mutual funds. It may be monthly, quarterly, or any such time interval.  

The term SWP refers to a Systematic Withdrawn Plan which is an investment tool that allows investors to withdraw a fixed amount with a fixed interval of time.

The term STP refers to a Systematic Transfer Plan which is a facility by which a pre-determined amount can be transferred from one scheme of mutual fund to another. 

-          For example, one person has invested in an equity fund and when he/she is about to retire then he must move funds to debt to reduce the risk of investment.

1.4          NAV (Net Asset Value)

The term NAV stands for Net Asset Value. The performance of the mutual fund scheme is represented by NAV per unit. NAV per unit is defined as the ratio of the total value of securities to the total units of the scheme on a given date.

-          For example, the market value of securities is 10 lakhs rupees and the fund has issued 5 lakh units for 1 rupee. Then NAV will be 10 lakh rupees/ (no of units issued * price per unit) or 10/ (5*1) or 2 rupees per unit.

1.5          Exit Load

Mutual funds are managed by the AMCs and ensure the growth of funds. These AMCs charge small amounts when investors redeem or exit the unit values of funds. This is called exit load. Exit load is calculated based on percentage NAV and deducted from investors’ total NAV values and the remaining amount is credited to investors’ accounts by the AMCs. 

-          For example,

Amount invested in MF on 1 Jan 23                        =10, 000 INR

NAV at the time of investment                               =100 INR

Units allotted                                                          =10, 000/100=100 nos.

NAV at the time of redemption                             =90 INR

Exit load                                                                 =1% of (Present NAV value (90) *Units bought (100)) =90 INR

Final redemption amount                                     =90*100- 90=9910 INR

1.6          Dividend Option

A dividend option in a mutual fund refers to the profit from the mutual fund investment which is distributed to the investors in the form of dividends. This amount is credited to the investor’s account at a regular period.

1.7          Growth Option

The growth option in mutual funds refers to the mutual fund where the profit is reinvested into securities and increases the unit of NAV of the investors. This provides great results as it uses the power of compounding.  

1.8          Benchmark Index

To track its performance every mutual fund needs to decide on some sort of reference index which is known as the benchmark index also. In general, the benchmark index is the index against which the scheme tends to measure its performance. 

-          For example, the NIFTY 50 index, contains stock stocks of the companies ranked amongst the top 50 in terms of market capitalization.   

1.9          Corpus

Corpus can be defined as the total money invested in a scheme by all the investors.

-          For example, if a total of 500 units are in an equity fund and the value of each unit is 10 Rs., then the corpus value will be 5000 INR.

1.10      Open-Ended & Close-Ended Funds Type

Those funds which allow investment and withdrawal at any time are called open-ended funds. These funds are preferable for any investor while funds that provide time-bound investment are known as closed-end funds. 

1.11      NFO

The AMCs sometimes launch new funds with lower NAV (say 10 Rs.) and try to attract investors through certain verbal commitments. A New Fund offer is a first-time subscription offer for a new scheme launched by AMC.

-          It is recommended to avoid investment in NFO rather than to select funds with a history.

1.12      Expense Ratio

The expense ratio refers to the value of money investors are paying to AMC to manage the funds. The expense will be always there irrespective of the fund’s financial situation. This should not be too high.

-          The tentative values of expense ratios lie between 0.5 to 0.75% for progressive good funds.