A Glossary of Terms About Mutual Funds You Must Know

Most investors, especially first-timers, juggle with the terms associated with mutual funds. The jargon like AUM (Assets Under Management), AMC (Asset Management Company), NAV (Net Asset Value), etc. can be confusing and daunting for the investors. However, these are very common terminologies that are frequently used in the context of mutual fund schemes. This article attempts to serve as a guide for you to understand these terms.

Apart from the glossary of words about mutual funds that we shall discuss, investors must also know about the governing bodies in India. The Securities and Exchange Board of India lays down the norms for the proper functioning of mutual funds. It mandates the rules for categories and types of schemes as well as ensures the investors’ interests. It is a regulatory body that sees mutual fund schemes that are launched in the market carry detailed and true information and function as per the rules. Similarly, the Association of Mutual Funds in India (AMFI) is an industry-standard organization that aims to develop the capital markets and mutual funds industry. Most of the mutual fund launching firms are its members and they ensure they work professionally and ethically.

Net Asset Value (NAV)

Net Asset Value is the market value of a mutual fund unit. The total assets of a fund scheme divided by the outstanding units in the market give the value of a single unit of the mutual fund scheme. Higher NAV means the per-unit price is high, hence the scheme is expensive but it also means that it has performed well over time. However, this does not guarantee that the fund will continue to offer high growth in the future as well. Sometimes, funds with lower NAV may offer higher returns and might be cheaper. Hence, NAV cannot be the final parameter to judge a fund’s performance.

Asset Management Companies (AMC)

Mutual fund schemes are launched by fund houses that can be of various types and can belong to different categories as mandated by SEBI. One firm can launch plenty of schemes. These firms or fund houses are asset management companies and they are called so because they pool in money from various investors and invest in various assets like stocks, debt securities, gold, etc. As they collect, manage, and invest the assets allocating them to various money market instruments, they are known as Asset Management Companies (AMCs).

Assets Under Management (AUM)

As the name indicates, the total assets that are under the management by an AMC are known as Assets Under Management (AUM). AUM indicates the corpus size of a fund house, larger size means more investors and higher invested money. It is also used as a trademark for trust and quality quite often, as reputed AMCs usually have more investors and larger AUM. However, it fluctuates marginally on a daily basis as entries and exits occur almost every day. Laks of investors may invest in schemes launched by the AMC and many may withdraw.

Expense Ratio

Investors are always advised to check the expense ratios before investing in a fund as it can affect the returns significantly. Mutual funds are professionally managed by fund managers who manage and allocate the corpus to various asset classes. The expense ratio is a percentage of the total returns that will be deducted from the returns as managerial and administrative costs. SEBI sets the maximum limit of the expense ratio that fund schemes can have depending on its types like equity, hybrid, or debt.

Entry/Exit Load & No-Load Funds

Most funds do not come with any lock-in period except for Equity Linked Savings Scheme (ELSS) and you can redeem the units whenever you want. However, if investors plan to invest for a particular tenure, the fund house assumes that it has the investors’ money for that duration and it can invest it likewise to generate returns. With an untimely withdrawal of investors, the funds cannot generate the same returns as fund managers plan. It takes a toll on them and hence charges an Exit Load. It is because they may sell off the units at lower costs or sell to third parties or pay commission to intermediaries, etc.

Similarly, some funds charge an entry load as well when investors enter or invest in a new scheme which is usually added to the NAV. This is added at the time of allotment of units. No-load funds are those funds that are free from any kind of entry/exit loads or any other such fees.

Systematic Investment Plans (SIPs)

SIPs are a mode of investment in mutual funds, which is an alternative to lump-sum investment. Using SIPs, you can invest monthly buying a few units of the scheme every time instead of one time. It has several advantages such as it allowing investors to invest in small amounts, develop regular investing habits, and get compounded interests. Also, you can enable Paytm Autopay for automatic deduction of the monthly SIP amount. SIPs also have the benefit of rupee cost averaging.

Systematic Withdrawal Plans (SWPs)

Just like SIPs, where you make periodic payments in place of lump sum investments, you can redeem units periodically instead of redeeming them at once. SWPs sell your units uniformly over tenure and pay back monthly, quarterly, or bi-annually.

Systematic Transfer Plans (STPs)

If you wish to switch from one scheme to another within the same AMC and do not want to sell off the units at once, then you may opt for STPs. Here, you periodically buy units of a scheme just like a SIP but these units are purchased at the cost of redeeming the units from another scheme. You can invest in a debt fund that is a low-risk, low-return fund and opt for STPs to purchase units in equity-oriented schemes to generate good returns and build capital.

ELSS (Equity Linked Savings Scheme)

Equity Linked Savings Scheme (ELSS) is a type of SIP which is the only tax-saver plan among the mutual funds. As the name suggests, it is an equity mutual fund and has a tax exemption of Rs. 1.5 Lakh under Section 80C of the Income Tax Act.

ULIP (Unit Linked Insurance Plan)

Some investors often confuse ELSS and ULIP where the latter stands for the Unit Linked Investment Plan and ELSS is a tax-saver SIP. ULIP is an insurance-cum-investment plan with tax benefits that you can avail of on the premium and maturity proceeds under Section 80C and Section 10(10D) of the Income Tax Act. It can be up to a maximum of Rs. 1.5 Lakh with the returns depending on the type of investment whether it is equity, hybrid, or debt.

Rupee Cost Averaging

This is a term more synonymous with SIPs where investors make periodic investments and purchase mutual fund units from time to time. When the NAV is high, you purchase lesser units and you can purchase more units when prices are low. This helps in averaging out the total costs of the purchase of the total units, which investors might buy at higher prices when purchased through a lump sum investment.

Wrapping it up:

Financial terms can be puzzling but the terms that are often used in the context of an investment avenue must be acknowledged by the investors. Smart investment requires updating oneself with the basic terminologies that can help you assess the funds’ performances, how they function, and understand the various types of schemes. The above glossary of terms is basics in the industry of mutual funds.

Are SIPs, STPs, and SWPs different types of mutual funds?
No. SIPs, SWPs, and STPs are not different types of mutual funds but they are the different modes of purchase and redemption of units in a mutual fund scheme.
Which is better: ELSS or ULIP?
A detailed comparison between the two is required to arrive at a decision. Also, different investors have different goals, and based on that, one may make the decision.
What is the difference between the NAV and the AUM?
The difference between the NAV and the AUM is that the NAV is the per-unit market value of a fund scheme and the AUM is the total assets that are under the management of the fund house.
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