Essential Terms Every Mutual Fund Investor Should Know

Mutual Fund Terminology

Mutual Fund Terminology

Whenever we are investing our money in any way. we must know the terminology of that investment method, where are we investing our money, how it is going to be invested, and whether the investment of our money will be safe?  etc. All this we need to know and this is all we are going to see today. 

Key Information Memorandum (KIM) 

Key Information Memorandum (KIM) Is a summary of the SID and SAI of the scheme offer document. It contains the Key Information about the scheme which is necessary for an investor to know. It is attached along with the application form for the scheme. 

Scheme Information Documents (SID) 

This document provides all the details about the scheme. It is part of the other documents of a mutual fund scheme. The SID of every mutual fund scheme is available for download from the website of the respective mutual fund company. 

Statement of Additional Information (SAI)

SAI Contains all statutory information of the mutual fund house that is offering the scheme. It is part of the offer documents of a mutual fund scheme. A single SAI is relevant for all schemes offered by the mutual fund company. 

Systematic Investment Plan (SIP)

The concept of a Systematic Investment Plan is similar to recurring bank deposits where investors contribute a fixed sum of money at regular intervals. (daily, monthly, quarterly) 

Systematic Transfer Plan (STP)

A systematic Transfer Plan allows investors to transfer the pre-defined amount on a specified date from one particular scheme to another by giving one-time instructions to the fund house. STP is a useful tool a step-by-step exposure to equities or to reduce exposure over a while. Investors sometimes want to withdraw their money from the equity mutual fund scheme and transfer it systematically to a debt scheme or money market scheme of the fund house or vice versa. 

Systematic Withdrawal Plan (SWP)

The concept of a Systematic Withdrawal Plan is exactly the opposite of a Systematic Investment Plan. SWP allows investors to redeem a fixed amount of their investments from their mutual funds at regular intervals. 

Total Expense Ratio (TER)

It is an annual charge on AUM in percentage terms. It includes investment management and advisory fees, sales commission and ongoing service fees, legal and audit fees, registrar and transfer agent fees fund administration expenses, and marketing and selling expenses. The NAV of a mutual fund scheme is net of all liabilities including  TER and, hence, a lower TER results in higher returns and vice versa. 

Annualized Return 

It refers to the compounded return that a fund would have generated over a year. This method is the best indicator of a fund's performance. 

Asset Management Company (AMC)

In the case of mutual funds, an Asset Management Company is a company registered with SEBI that makes investment decisions for the mutual fund and manages its assets. 

Asset Under Management (AUM)

It is the Total Market value of the investment managed by a mutual fund. 

Asset Allocation 

It is the process of allocating the overall corpus of a mutual fund scheme to different assets like Equities, Bonds, Real Estate, Derivatives, etc. 

Benchmark

Benchmark usually refers to the market index, whose performance is used as a standard or benchmark to measure the investment performance of mutual fund schemes. Some benchmarks include the NIFTY, SENSEX, NIFTY500, BSE200, BSE500, NIFTY MIDCAP, etc. 

Compounded Annualised Growth Rate (CAGR) 

We often hear the word CAGR, which refers growth of the rate of investment annually. CAGR is one of the ways to measure the performance of any investment. It calculates the growth rate of investment per annum by considering the compound effect. 

Corpus 

Corpus is the total investable funds available with a mutual fund scheme at any point in time. 

Diversification 

Diversification is the investment strategy of not putting all the eggs in one basket. By diversifying a portfolio across different industries, the overall risk of the portfolio is reduced.  

Dividend 

It is a sum of money paid regularly (typically Monthly, Quarterly, or Annual) by a company to its shareholders and to unit holders in case of mutual funds out of its profits. 

Fund Manager 

A professional fund manager is appointed by the Asset Management Company to invest money by the objectives of the scheme. 

Load 

A charge by the fund when an investor buys (entry load) or Sells ( exit load) units in the fund. 

Net Asset Value (NAV) 

The NAV per unit of the mutual fund is calculated as the total assets minus all the expenses and dividends by the number of outstanding units. This is the main performance indicator for any mutual fund, especially when viewed in terms of application over some time. The NAV is calculated at the end of every business day and it is the value at which the investor enters or exists the mutual fund. 

No loaded Fund

A fund that does not charge any load (sales charge) when an investor enters or exits the fund. 

Reinvestment Plan 

It is a plan where the earnings of a mutual fund scheme that is dividends are reinvestment back in the fund. 

Switching 

Transferring from one scheme to another in a group of schemes operated by mutual funds, where the rules so permit. A switching fee may or may not be charged. 

XIRR 

XIRR is one of the ways to measure the performance of any investment. It calculates the growth rate of investment per annum by considering the compounding effect. Instead of CAGR, XIRR is used when investments are not made a one go but are made at different points in time.