Mutual Funds are a type of investments where the investor can invest in a fund or asset which is basically equity, debt, shares, or gold professionally managed by financial experts, mutual funds are a great way of investment as it has tax-benefits as well.
To understand the mutual funds investment process in a better way, it’s important to understand the terminology associated with mutual funds, let’s glance at the same:
Asset Management Company
Asset Management Company (AMC) is the company which looks out for funds of the individuals. A mutual fund is a trust registered under Indian Trust Act. It is initiated by a sponsor, a sponsor is a person who acts alone or with a corporation to establish a mutual fund. Then the sponsor appoints AMC to manage the marketing, finances etc of the mutual fund. In India all AMCs are required to be registered with SEBI before starting its operations.
Net Asset Value
Net Asset Value or NAV is the price per share or unit of a mutual fund. As it is the share price for stocks, it is NAV for mutual funds. It is important to note that, as share prices have fluctuations in the prices, NAV is fixed. NAV is being calculated at the end of the trade and thus remains constant.
NAV = (Assets of the funds - Liabilities of the fund)/ Number of outstanding units of the fund
Mutual funds usually have both growth and dividend options. In the growth option all the gains, interests, bonus the fund earned is not distributed among the investors, while it is re-invested in the scheme again. The effect is shown in the NAV, no holding is taken out of the fund, the investor can access the gains only after redeeming the mutual fund they have invested in. The NAV of the growth option is higher than the dividend option as no gain is taken out when considering the growth option.
Dividend options is a function where the investor gets intermediate payment from the dividend gain from the mutual fund investment. For example if the NAV of a particular stock increases from ₹13 to ₹15, then the investor is alleged to be paid ₹1.5 as the dividend. Post the dividend payment the NAV would fall to ₹13.5 from ₹15. There are two types of dividend option - dividend pay-out and dividend reinvestment.
Asset allocation is the asset mix of equity, fixed interest rates and cash or cash equivalents. The asset allocation depends on the type and objective of the fund. The asset allocation is managed by the fund manager. To know more about the fund the investors should read the offer document.
Systematic Investment Plan
Systematic Investment Plan (SIP) is one of the favorite terms for mutual fund representatives. SIP allows investors to invest in a scheme on a monthly basis with a minimal amount of ₹500. Every month fresh units can be brought by the investors by checking the NAV of the day.
Systematic Transfer Plan
Systematic Transfer Plan (STP) is a leverage given to the investor in order to secure them from market volatility. Suppose an investor wishes to invest in an equity mutual fund, in order to be secure after the investment the investor can first invest in a debt fund, and gradually every month can transfer some amount from debt fund to equity mutual funds. STP ensures financial security of the investor and that is why it is considered a safer way to invest in mutual funds.
Systematic Withdrawal Plan
As the name suggests systematic withdrawal plan or SWP allows the investor to withdraw the gains from the investment over a period of time, which can be used by the investor for further use or as pension in old age.
New Fund Offer
New Fund Offer or NFO is similar to an IPO of a company. It is usually offered to the investors in order to fund a particular scheme, under a given unit price. After the offer is closed the investor can sell the unit at the current NAV.
There are two types of load - Entry and Exit Load. The operating and administrative amount paid at the starting of the investment period is called the entry load, while the amount collected at the redemption of the funds is called the exit load. All funds do not charge load, it depends upon funds to funds.
As discussed earlier, mutual funds have been the most spoken topic in the investment world. And before investing and researching about a particular fund or scheme, investors should be aware about these terms as they are very often used while dealing in mutual funds.