9 mutual fund terms you need to be aware of while investing

Mutual funds as an investment are considered today one of the top choices amongst retail investors. Further investing in mutual funds depends on the investor’s objectives, goals, and risk appetite. Today, there are various categories of mutual funds classification such as equity fund, debt fund, hybrid fund, solution-oriented funds, etc, therefore before investing it is crucial to know what are the various terms assoicated with the mutual funds. Let’s take a look at some of the terms that are important to understand:

1. NAV

Net Asset Value (NAV) is a mutual fund company’s per-share value. It is derived by deducting the fund’s liabilities from its current market value assets and then dividing it by the outstanding shares.

2. Asset class

An asset class refers to a group of investments and securities whose features are identical. For instance, the most common asset classes are equities, debt, fixed income securities, and cash equivalents.

3. Expense ratio

In the mutual fund industry, the expense ratio refers to the maintenance charge the mutual fund company applies to finance its expenses and costs. It includes costs related to management fees, advertising costs, allocation fees, and operating costs of the funds. Further, this also includes entry fees, exit fees as well as brokerage fees.

4. Benchmark

Benchmark is a tool used by mutual fund companies, especially the fund manager, to compare against benchmark returns versus how much their fund has earned. If the fund managers beat its benchmark return, the fund is considered to be doing well. In India, BSE Sensex and NSE Nifty are well-known benchmarks investing in some large-cap companies’ stocks.

5. Direct and regular mutual fund plans

In January 2013, the market watchdog Sebi mandated the fund houses and asset management firms (AMCs) to categorised mutual funds into two categories, namely regular funds and direct funds. A direct mutual fund is purchased directly from the fund house or AMCs by investors. In this case, between investors and fund houses, there is no intermediary, agent, or distributor.

That said, a regular mutual fund is distributed by a third party, agent, or distributor. When the agent successfully finds the investors, the AMC pays the agent a commission or brokerage fee. As a result, the expense ratio of regular funds would be greater than the expense ratio of direct funds. However, the regular and direct funds would have the same asset allocation, investment objective, and fund manager(s).

6. Fund manager

A fund manager is the one who is responsible for handling investors’ money and investing in the securities that generate returns for the investors. Typically, in a fund house, different fund managers manage different funds based on their type. The equity fund manager would be different from the debt fund manager in terms of investment objectives, goals, and fund philosophy.

7. Redemptions

Redemptions mean the resale of the mutual fund units back to the mutual fund house.

8. Investment objective

Investment objective denotes what the fund’s goal is and its strategy to raise money or returns for the investors. Various funds have different investment objectives based on which kind of fund it is. For instance, for the equity mutual fund, the investment objective would be to earn greater profits by taking more risk. For the debt funds, it would be to safeguard the investor’s return and invest more safely in government securities.

9. Dividend

A dividend is a form of income distribution to its investors from the fund house investment income.