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Investors’ Guide: You must understand the meaning of these terms before investing in mutual funds

by BankingTricks Desk
Mutual Fund

Global markets including India’s market have given very good returns over the past. However, not everyone is adept to do trading on his own. To solve this problem, Mutual Funds is the solution. Here professionals will invest your money with their expertise.

 Mutual fund investment has seen huge growth. Recently, the ministry of finance in a reply to a question in Lok Sabha tells that more than 70 per cent of mutual fund investors come from sub 5 lakh, annual income group. Undoubtedly, mutual funds are very good investment options, but investing your money just due to some hearsay is not a prudent choice. It is important for an investor to know the basic terminology related to mutual funds. For young and new investors, we have listed a few very important terms used in mutual funds. Have a look at it.

  • Asset Management Company (AMC):

 Asset management companies under Mutual Funds are colloquially called money managers or money management firms. These are also called fund houses. A company or financial institution that operates publicly to invest in mutual funds or exchange-traded funds (ETFs) is known as an investment company or mutual fund company. Every Asset Management Company is registered with SEBI.

  • Net Asset Value (NAV):

 NAV or Net Asset Value is the price at which you buy a single unit in a mutual fund scheme. Mutual funds are divided into small parts so that even a small investor can invest in them. Each divided part is called a unit, and the cost of that one unit is called the NAV or Net Asset Value.

Read more: What Are IPOs? What You Should Take Care Before Investing Into One?

  • Automatic Investment Plan:

An Automatic Investment Plan is a method of investing, in which investors have the facility to make their own strategy to invest at a fixed interval. In this, the money set by you is automatically deducted from your bank account on time.  An automatic investment plan is a good way to save money.

  • Blue Chip Fund:

Blue Chip companies are those whose size is and market cap is very large, and are very strong financially. Those mutual funds which invest in such blue-chip companies are called bluechip funds.

  • Corpus:

 Corpus is the total accumulated capital of an individual in a mutual fund and the total money that will be collected by investing in a mutual fund in the future. In the financial context, the term corpus is used as a collection of funds.

  • Closed-Ended Scheme

 Such mutual funds in which the investment limit is pre-fixed.  After that time frame, such Mutual Funds are closed for direct investment. Under the close-ended scheme, money is collected from the investors through NFO (New Fund Offer).  As soon as all the units of that mutual fund are bought by the investors, that mutual fund is closed for the direct investment of a new investor.

  • Open-Ended Scheme:

As its name suggests, this open-ended scheme is open as in its name. This means that the investor can invest in it at any time and can also exit from it anytime. However, investors have to pay some charge as exit load if they redeem before a certain time, usually 1 year, for the purpose of holding them for a longer period of time. This charge varies between 1% and 2%.

  • Entry Load:

When an investor invests in a scheme of Mutual Fund or redeems the investment, then the mutual fund company takes some charge from him, this fee is simply called the entry load. In other words, when an investor invests money in a scheme, the charge at that time is called entry load. It is charged for expenses incurred on your investment by AMC. Different mutual fund houses charge different fees as entry load. However, it is important to mention here that with effect from August 2009, SEBI has abolished the system of entry load on investments in mutual funds.

  • Exit Load:

If an investor redeems his investment of Mutual Fund, then the charge on him at that time is called exit load. The purpose behind charging exit load is that the investor should not withdraw money from any scheme barring contingency.  An exit load is charged at the time you receive payment for your investment from the mutual fund, an exit load may or may not be charged to you whenever you decide to sell the units of your mutual fund as well. The exit load is calculated as a percentage of the money redeemed.

  • Expense Ratio:

Many types of expenses of Mutual Fund House or AMC are called Expense Ratio. Expense Ratio lets us know exactly how much the mutual fund management is charging you for your investment portfolio. Expense ratio is a ratio that shows the expenses incurred on managing a mutual fund in terms of per unit. This means the expense ratio is the annual fee paid by investors to a mutual fund house or asset management company for managing a scheme.

  • Fund Manager:

 A fund manager has a very crucial and key role in any mutual fund industry. He is the primary authority who manages the whole fund and decides where to invest money and in what proportion. The fund manager keeps an eye on the market and economy trends before investing. The fund manager decides the direction of the portfolio of any investment. So it is important to know about the fund manager of your fund.

  • Index Fund:

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Index funds are a category of natural funds. As the name suggests, such funds invest in the shares of a company included in an index like Nifty or Sensex of the stock market. This means the performance of such mutual funds is similar to the index they are pegged with. Index funds are also known as index tide or index tracked mutual funds.

  • Lock-in-Period:

 The Lock-in period is a time during which the investor cannot withdraw the deposited amount. In Equity Linked Savings Schemes (ELSS) in Mutual Funds, an investor cannot redeem his fund for 3 years from the date of investment. This means that the lock-in period of this fund is 3 years.

  • Lump-sum:

When the accumulated money is invested in a mutual fund in one go, then it is called lump sum investment. During the fall in the stock market, the price of the share and the NAV goes down. In such a situation, you can buy as many units as possible by investing in equity or debt funds through lump-sum.

  • Systematic Invest plan (SIP):

Systematic Investment Plan (SIP) or SIP disciplines your Mutual Fund investments. In this, instead of investing the entire money at once, the investor keeps investing a fixed amount every month or at a fixed interval. SIP gives you the opportunity to put a certain amount of money in your mutual fund scheme every month. You can turn it off anytime at your convenience.

  • Systematic Transfer Plan (STP):

A systematic Transfer Plan is a scheme of Mutual Fund, where a pooled amount is invested in a particular scheme. Out of that, a certain amount is transferred to some other scheme at pre-determined time intervals. This gives an opportunity to shift investment from one fund to another depending on the volatility of the market. The risk of market stability can be avoided with STP.

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