Remember the song that went "When you read, you begin with A, B, C, when you sing you begin with do, re, mi"? Like an alphabet book is for those learning the language, this is the place to start if you want to begin investing intelligently in mutual funds.
A mutual fund is a financial product that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the money into specific securities (stocks or bonds or units of other funds etc). When you invest in a mutual fund, you are buying portions of the fund and become a shareholder of the fund. Like most other products, mutual funds too have their own language. Here's a look at some of the most commonly used phrases.
Fund type: Funds can be classified as open-ended or closed-ended, load or no load funds, and as active or passive. An open-ended fund can buy and repurchase units at all times; closed-ended funds make a one-time sale of a fixed number of units. Load funds are those that charge entry or exit fees to take care of sales expenses; no-load funds do not impose these charges. Active funds aim at performing better than their benchmarks whereas passive funds try to construct a portfolio that mirrors the return of a given market index (or benchmark).
| EXPLANATION | EXAMPLE | |
| Fund type varies depending on investment objective | Diversified equity | Sector |
| Fund name There are more than 800 schemes | HDFC Equity | ICICI Pru FMCG |
| AUM varies across funds. Size isn't correlated with performance | Rs 4,243.96 cr | Rs 74.19 cr |
| NAV is the purchase price. Low priced funds aren't always better | Rs 176.15 | Rs 49.4 |
| Returns Look for annualised and longest possible period | 12.78% | 16.18% |
| Entry load varies with amount and schemes | 2.25% | 2.25% |
| Exit load varies with amount, tenure and scheme | 1%* | Nil |
| Benchmark Compare your fund's performance with this | S&P CNX 500 | S&P CNX FMCG |
| Examples of fund type and scheme are randomly picked. * If redeemed within one year. NAV as on May 21; corpus as on April 30 | ||
Loads: These are the fees charged by fund houses for compensating brokers and other sales people for selling funds. Entry or front load is charged when an investor enters the scheme. A back-end or exit load is charged if investors leave the fund before a specified term.
NAV: The net asset value or NAV measures the current rupee value of every one unit of the mutual fund. It is calculated by dividing net assets (total assets minus liabilities) by total number of units. The NAV (for openended funds) is computed at the end of every trading day based on the closing prices of securities. Sale and repurchase prices of funds are based on their NAVs.
AUM: Assets under management or AUM is the total market value of investments (equity plus debt), managed by the asset management company (AMC) of a mutual fund on behalf of its investors.
Benchmark: A benchmark is a standard against which the performance of a fund and fund manager is measured. Generally, the benchmark is an equity or debt index (such as the Sensex or Nifty). Funds which consistently beat their benchmarks are considered outperformers.
Returns: A fund's return refers to income received or capital appreciation. It is measured as the percentage change in value of investments over a period of time. In mutual funds, NAVs and dividends received are used for computing returns. There are different ways of measuring returns such as point to point or absolute returns.
