Understanding Mutual Fund Terminologies

Preethi was a disciplined saver. She consistently saved up 20% of her income each month. In fact, she had a separate savings bank account for this purpose alone, and she never questioned her savings strategy. That is until a colleague who worked in finance introduced her to mutual funds. Intrigued, she read up this investment product and found that mutual funds can be a great long-term option to create wealth.

A mutual fund essentially pools money from several investors and invests the consolidated fund in the financial markets. The corpus is managed by highly skilled professionals known as fund managers, who are responsible for formulating and implementing various investment strategies.

If you, like Preethi, are new to the world of investment in mutual funds, one of the main challenges that you may face would be about understanding the various mutual fund terminologies. To help you out, here are some of the most important mutual fund terminologies, their meanings, and their significance.     

1. Assets Under Management (AUM)

The term Assets Under Management, also known as AUM, refers to the total cumulative market value of all the investments managed by a mutual fund house. For instance, let's assume that the total value of all the assets managed by a mutual fund is Rs. 20,000 crores. Then, the AUM of the mutual fund would then be Rs. 20,000 crores.

2. Net Asset Value (NAV)

The NAV, or the Net Asset Value, is one of the most important mutual fund terminologies. This value is essentially the price of a single unit of the mutual fund. The NAV is constantly fluctuating and is recalculated each trading day.

The Net Asset Value is derived by dividing the total net market value of the mutual fund’s assets by the total number of mutual fund units. For example, if the total market value of the assets is Rs. 5,00,000 and the number of mutual fund units is 50,000, then the NAV would be Rs. 10.

3. Mutual fund portfolio

The mutual fund portfolio, also known as mutual fund holdings, is a statement that displays all the investments and securities that the fund has invested in. It gives you detailed information on all the securities purchased, making it easy to identify where exactly the investments have been made. As a general rule of thumb, each entry in the portfolio is displayed in terms of the rupee value of the individual investment as well as a percentage to the net assets in the portfolio. On the Moneyfy app from Tata Capital, you can compare different funds based on each scheme’s portfolio before making an investment decision.

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4. New Fund Offer (NFO)

Any new mutual fund scheme that is introduced by an investment company or an Asset Management Company (AMC) is termed as a New Fund Offer (NFO). It is similar to an Initial Public Offer (IPO) in the equity market, and it’s introduced with the intention to attract investors and raise capital for investing in the financial markets. 

5. Open-ended fund

When it comes to investment in mutual funds, it is highly essential for investors to know whether the fund is open-ended or close-ended. Open-ended funds are the most popular and widely available kind of mutual funds in the market. With an open-ended mutual fund, there is no limit to the number of units on offer. You can buy the units of such funds or sell them at any point in time directly from the investment company, and they do not have any fixed maturity period.  

6. Close-ended fund

Unlike open-ended mutual funds, a close-ended fund has a fixed number of units on offer. They can be bought only at the time of a New Fund Offer (NFO). However, the units of these funds can be traded in the stock market through stockbrokers, similar to shares. Also, there is a maturity period that is predetermined during the time of issue itself. If you’ve bought units of a close-ended fund, you can either hold them till the date of maturity or sell them in the open market before the maturity date comes along. However, you need to keep in mind that while the units are available for trading on the exchange, there is limited liquidity in the Indian market.  

7. Systematic Investment Plan

A Systematic Investment Plan (SIP) is basically a strategy for investment in mutual funds. With an SIP, investors are required to contribute a predetermined fixed sum of money at regular intervals. This strategy utilizes the power of rupee cost averaging to reduce the impact of market volatility, curtails the inherent market risk, and eliminates the need to time the market. Preethi made her first investment in mutual funds as a lump sum amount. But with time, she learned the benefits of SIP and switched to this investment strategy. The Moneyfy app from Tata Capital allows you to start an SIP, so you can engage in goal-based investing.

8. Exit load

A load is basically a charge levied by the mutual fund house to compensate for the costs incurred by them with respect to buying or selling of units. The load that is charged at the time of sale of mutual fund units is termed as back-end load or exit load. Generally, fund houses charge a load as a percentage of the total value purchased or sold by an investor.

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Conclusion

This list of terminologies includes many terms that can help new investors like Preethi (and you) understand mutual funds better. It’s merely illustrative and not exhaustive, though, and now that you’re aware of these commonly used terms, you can continue to build up your knowledge about mutual funds before you go ahead and start investing. When you’re ready, you can make your first investment in mutual funds easily on the Moneyfy app, which allows you to invest in many top-rated funds to create wealth and to save taxes.