New to mutual funds? Understand these terms to get clarity

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As a new investor in the world of mutual fund products, one should be familiar with several of the most often used phrases as well as their basic definitions. Here is a list of commonly used words like SIP, NAV, AMC, AUM, which you should know about before investing.

SIP

The term SIP refers to a Systematic Investment Plan, which is a method of investing in a mutual fund on a periodic basis over time. The investment can be made on a monthly or quarterly basis. The investor must commit to investing a predetermined sum of money, which will be used to purchase units.

It is primarily based on the premise of regular and periodic acquisition of securities in the form of shares or units. Payments for SIPs can be made manually or automatically once a month, once a quarter, or at the investor’s discretion.

NAV

The performance of a particular scheme of a mutual fund is represented by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme. Mutual Funds invest the money collected from investors in securities markets. Since the market value of securities changes every day, the NAV of a scheme also changes on a daily basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

AMC

The word AMC refers to an asset management company (AMC).  Asset management companies (AMCs) are firms that pool money from individual and institutional investors and invest it in various securities. The funds are invested in capital assets such as stocks, real estate, and bonds. Asset management companies employ professionals known as fund managers to manage their investments, while a research team selects the appropriate securities.

Fund managers select investment options that are consistent with the fund’s objectives. For example, a debt fund invests primarily in bonds and government securities to protect investors’ capital and earn a consistent return. An equity fund’s primary objective is to invest in companies’ stock to maximise returns for investors.

AUM

AUM stands for Assets Under Management. It is the total market value of the investments managed on behalf of clients by a person or entity.

While some financial companies’ AUM covers mutual funds, banks, deposits, and cash, others limit it to funds under discretionary management, in which the investor delegated permission to the company to trade on his or her behalf.

Additionally, AUM aids in the evaluation of an investment or a business in general. Generally, a firm’s larger AUM and greater investment inflows are regarded as favourable indicators of quality and management expertise.

Load fund

A load fund is a mutual fund that charges a commission or sales charge upon purchase. The fund that an investor pays will constitute the load because it will be used to compensate a sales intermediary, such as an investment advisor, broker, or financial planner, who invests his or her time and skills in selecting an appropriate fund for the client.

The load is either paid upfront at the time of purchase (called front-end load or entry load), or when the shares are sold (called a back-end load or exit load), or it is paid continuously as long as the funds are held by the investors (called level-load).  With effect from August 1, 2009, Sebi’s new guidelines state that no entry load will be charged on purchases of existing mutual fund schemes or new mutual fund schemes.

Portfolio

The phrase “portfolio” refers to a collection of financial assets, which may include stocks, bonds, currencies, and cash equivalents. Additionally, they include fund alternatives such as closed funds, mutual funds, and exchange-traded funds. Additionally, it can comprise non-publicly traded securities such as private investments, real estate, and art.

These portfolios may be handled directly by investors or by money managers and financial experts. An investor can construct his or her investment portfolio in accordance with their risk tolerance and investment objectives. Additionally, investors can maintain different portfolios for a variety of goals.

Asset allocation

The phrase “Asset Allocation Fund” refers to a fund that invests in a diverse range of asset types. It can be either variable or fixed in nature across a variety of asset classes, which means it can be restricted to a specific percentage of asset classes or allowed to overweight some depending on market conditions. Asset allocation funds frequently invest in equities, bonds, and cash equivalents.