Glossary of Mutual Fund Terms
06 Sep 2023
Navigating the world of mutual funds can be daunting, especially for beginners. Understanding the standard terms and concepts associated with mutual funds is crucial for investors to make informed decisions and maximize their investment potential.
When investing in mutual funds, understanding the jargon and mutual funds terminology used in the industry is crucial. Whether you are an experienced investor or just starting, familiarizing yourself with mutual fund terms will help you make informed decisions. In this mutual funds glossary, we will explore a range of terms used in mutual funds. So let's dive in and expand your knowledge of the glossary of mutual fund terms.
What is NAV?
NAV stands for Net Asset Value. In the context of mutual funds, NAV represents the per-share value of a mutual fund. It is calculated by dividing the total value of all the fund's assets by the number of outstanding shares.
The calculation of NAV is typically done at the end of each trading day. It considers the market value of the fund's securities, including stocks, bonds, and other assets, subtracts any liabilities, and divides the result by the number of shares outstanding. The NAV per share reflects the value at which investors can buy or redeem shares in the mutual fund.
NAV is an essential metric for mutual fund investors as it provides a snapshot of the fund's underlying value. It helps investors track their investment performance and assess the fund's relative worth over time. Changes in NAV are influenced by various factors, including the performance of the fund's investments and any income distributions or capital gains realized by the fund.
What is SIP?
SIP stands for Systematic Investment Plan. It is an investment strategy commonly used in mutual funds. With SIP, investors commit to investing a fixed amount of money regularly. This amount is deducted automatically from their bank account.
SIPs offer flexibility to investors. They can choose the amount they want to invest per installment and the frequency of investments, and they can also modify or stop their SIPs at their convenience.
SIPs are popular among investors who aim to invest systematically, overcome market timing concerns, and build wealth gradually. It allows individuals to start investing in small amounts and benefit from disciplined investing. Additionally, SIPs provide the convenience of automating investments, making it easier for investors to stick to their investment plans.
What is AMC?
AMC stands for Asset Management Company. An AMC refers to the company or entity responsible for managing and operating the mutual fund scheme in mutual funds. The AMC acts as the investment manager and is entrusted with making investment decisions on behalf of the fund's investors.
An AMC is typically a separate legal entity, distinct from the mutual fund itself. It may be a financial institution, bank, or independent investment management company subsidiary. The AMC oversees all aspects of the mutual fund's operations, including investment management, compliance, administration, and customer service.
AMCs are critical players in the mutual fund industry, responsible for managing mutual fund investment portfolios and catering to investors' investment needs. They significantly shape mutual fund investors' investment strategies, performance, and overall experience.
What is STP?
STP stands for Systematic Transfer Plan. It is an investment strategy commonly used in mutual funds that allow investors to transfer a fixed amount or a certain number of units from one mutual fund scheme to another at regular intervals.
With STP, an investor allocates a certain amount or a specific number of units from one mutual fund scheme, the source scheme, to another, the target scheme. The investor decides the frequency and amount of transfers.
STP allows investors to gradually move their investments from one scheme to another, enabling them to diversify their portfolio or align their investments with changing market conditions. It can be beneficial when an investor wants to shift from a more aggressive fund to a more conservative one or vice versa.
STP provides convenience by automating the transfers between schemes, eliminating the need for manual redemption and reinvestment.
What is SWP?
SWP stands for Systematic Withdrawal Plan. With SWP, an investor plans to withdraw a fixed amount or a specific number of units from their mutual fund investment. The investor decides the frequency and amount of withdrawals.
SWP is often used by investors who seek regular cash flow or income from their mutual fund investments. By setting up an SWP, investors can receive a predetermined amount on a scheduled basis, providing them with a steady income stream.
SWP reduces the investment value over time as the specified amount of units is redeemed. Investors must carefully consider the impact of regular withdrawals on the long-term growth potential of their investment and ensure they have sufficient remaining funds to meet their financial objectives.
SWP can benefit investors who require a regular income stream or want to manage their cash flow from their mutual fund investments. However, investors should assess the potential tax implications, fees, and the performance of the mutual fund scheme before initiating an SWP.
Entry load and exit load are terms used to describe the fees or charges associated with buying (entry) or selling (exit) shares of a mutual fund.
Entry load refers to a sales charge or fee that investors may be required to pay when purchasing mutual fund shares. It is deducted from the investment amount and reduces the number of shares acquired. However, it's important to note that entry loads have become less common in many jurisdictions, including the United States, as regulatory changes have eliminated or significantly reduced them.
Exit load refers to a fee or charge imposed on investors when they sell or redeem their mutual fund shares. It is typically a percentage of the redemption value or the NAV and is deducted from the sale proceeds. The purpose of an exit load is to discourage short-term trading and encourage long-term investment in the fund.
As the name suggests, a no-load fund is a mutual fund that does not charge investors any sales or redemption fees. These funds are designed to be free from any upfront or back-end sales charges, allowing investors to invest in the fund without incurring additional costs related to buying or selling shares.
Investing in a no-load fund can appeal to investors who prefer to avoid sales charges or wish to have more control over their investment costs. It's important to note that although no-load funds don't charge sales loads, they may still have other fees, such as management fees and operating expenses, which are disclosed in the fund's prospectus.
Investors should carefully review the prospectus and consider the overall cost structure, investment strategy, and fund performance before making an investment decision.
What is AUM?
AUM stands for Assets Under Management. It is a financial metric representing the total market value of all the assets (investments) that an investment management firm, such as a mutual fund company, manages on behalf of its clients.
AUM is calculated by adding the market value of all the investments in a firm's portfolios. This includes stocks, bonds, cash, and other securities the firm manages for its clients. It is often linked to the fees charged by the investment management firm. As the AUM grows, so does the revenue generated by the firm. However, it's important to note that the fee structure can vary among different firms and investment products.
AUM can have an impact on the investment performance of a fund. As the AUM increases, it may become more challenging for the fund manager to effectively deploy the capital and achieve the same level of returns. It can also impact the fund's ability to invest in particular securities due to liquidity constraints. AUM provides a snapshot of the total value of assets managed by an investment management firm and serves as an important metric in assessing the firm's size and capabilities.
What is NFO?
NFO stands for New Fund Offer. It refers to the launch of a new mutual fund scheme or investment product by an asset management company (AMC). During an NFO, the AMC offers investors units of the new scheme for the first time.
NFO represents the introduction of a new mutual fund scheme by an AMC. The scheme could be of different types, such as equity funds, debt funds, hybrid funds, sector-specific funds, or any other specialized category based on the scheme's investment objectives.An NFO has a defined subscription period during which investors can subscribe to the new scheme by purchasing its units.
Investors considering investing in an NFO should carefully evaluate the scheme's investment objectives, risk factors, track record of the AMC, and the potential fit with their investment goals. It's important to note that while NFOs may offer the opportunity to invest in a new scheme at the initial offer price, they also carry inherent risks associated with investing in a new and untested scheme. As with any investment decision, investors should conduct thorough research and seek professional advice.
Understanding mutual fund terms and terminology is essential for investors seeking to navigate the world of mutual funds. This glossary of mutual fund terms has provided an overview of some key concepts and terms used in mutual funds.
By familiarizing themselves with terms used in mutual fund, investors can gain a deeper understanding of how mutual funds operate, evaluate the performance of funds, make informed investment choices, and effectively communicate with their financial advisors or fund managers.
By staying informed about mutual funds terminology and understanding the nuances of different mutual fund terms, investors can become more confident and knowledgeable participants in the world of mutual funds.
The contents of this article/infographic/picture/video are meant solely for information purposes and do not necessarily reflect the views of Bank of Baroda. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy; completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Bank of Baroda or its affiliates to any licensing or registration requirements. Bank of Baroda shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
Analyzing Mutual Fund Performance
Investing in mutual funds is a popular choice for individuals seeking a diversified and professionally managed investment portfolio. Whether you are a seasoned investor or a novice, assessing the performance of your mutual funds is a critical aspect of successful investment management. By analysing the performance of your mutual funds, you can gain valuable insights into the effectiveness of your investment strategy and make informed decisions for your financial future.
How To Calculate Mutual Fund Returns
Investing in mutual funds is a popular choice for individuals looking to grow their wealth over time. However, assessing the performance and profitability of these investments requires a clear understanding of how to calculate mutual fund returns. Mutual fund returns provide valuable insights into the growth or decline of your investment over a specific period. By analyzing these returns, you can evaluate the success of your investment strategy and make informed decisions for future investments. In this article, we will take you through the intricacies of calculating mutual fund returns step-by-step.