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Mutual Funds And All Its Complex Terms!

Mutual Funds And All Its Complex Terms!

Mutual funds are a blessing in disguise for all investors. But they come with a complex set of jargon that might deter you from investing. Our advice – Don’t get intimidated by these words because it takes <3 minutes to understand them. All you need to do is refer to this short glossary. 

General Terms

A mutual fund collects money from investors and invests the money on their behalf. It also charges a small fee for managing this money.

Think of it like going to Paris for a holiday but through a tour instead of on your own. You just need to pay the travelling tour a fee and they will arrange things for you.

An item that a person owns and has the power to use. Assets could be non-financial or financial.

Non-financial assets are tangible: Like a house, property, gold, commodities like rice, oil etc.

While financial assets are not tangible, but they signify a contract. Mutual funds, shares, bonds, bank deposits etc. are financial assets that promise some return in exchange for an initial investment. 

The money one has to pay someone else such as loan payments, rent, etc.

An AMC manages a mutual fund. In simpler words, the company that actually takes and makes the investment decisions for a mutual fund company is an AMC. They are the professionals that invest the money collected by the mutual fund in different assets.

Asset under management means the total market value of the assets managed by an AMC. 

The total amount of money invested by all investors in a scheme.

Similar to how shares represent the extent of equity ownership in a company, units represent the extent of ownership in a mutual fund. And a unitholder is an investor who invests money in mutual funds.

The portfolio is a range of investments made by a person or organization. Let’s say you’ve invested in Reliance Equity Fund (called as reliance vision fund) then its portfolio is made up of all the companies that the fund invests in.

Market capitalization tells you how much a company is worth. It is calculated by multiplying the price of one share into the total number of shares in the hands of investors.

Example Tata Motors has 100,000 shares trading at Rs 500

Market capitalization= 100,000* 500=  Rs 5,00,00,000/-

The market capitalization keeps fluctuating because share prices keep moving up and down.

An index is an indicator to tell us how the markets are performing. They aren’t made up of all companies listed on the stock exchange but only a few selected ones that show similar characteristics. They could be the top 50 best-performing stocks, or stocks only from the pharma sector, or stocks made up of only small companies. The values of these selected stocks are used to calculate the index value. If the prices of these stocks change then the index value will also change, giving us an idea of how the markets are performing.

Benchmark normally means a limit or measure where you will judge your performance against something. Similar in mutual funds, the fund manager will compare their performance against a certain benchmark i.e. indices.

Terms Related To Documentation

Known as CAS – A Consolidated Account Statement gives an investor all the details of his/her mutual fund transactions in an orderly manner at a single place. It shows the mutual fund investments that have been done so far under a single PAN. One can request for both a hard copy as well as a soft copy of the same once a month for free.

Since, CAS contains all information regarding sales, purchases and other transactions, it has all the necessary insights for the investor to track the mutual fund’s performance.

A mutual fund annual report, along with a fund’s prospectus and statement of additional information, is a source of multi-year fund data and performance, which is available to all those who are interested to invest in the fund.

Similar to a bank account number, a mutual fund folio number is a unique number to keep a track of your mutual fund holdings. This folio number is required whenever you need to find the value of your investments and at the time of buy/sell transactions. An investor can make multiple purchases by using the same folio number. But at the same time, there is no restriction on the number of folios you can have with a particular AMC. And in case you want to merge your folios you can ask the AMC to do it for you. Note that this cannot be done if you own mutual fund schemes from different AMCs. 

Offer document (aka prospectus) from a mutual fund house is a document offering its scheme(s)to the public for investing. There are 2 parts to this offer document – Statement of Additional Information (SAI) and Scheme Information Document (SID).

SAI contains all statutory information of the Mutual Fund house

SID carries important information about the scheme(s) such as their investment objective, asset allocation pattern, investment strategies, the risk involved, benchmark indices for respective scheme(s), who will manage the scheme(s) and fees & expenses; amongst a host of others for making an informed investment decision.

Direct Plans is when an investor directly invests in mutual funds through a trade exchange or an AMC website.

A Regular Plan is when investors invest in mutual funds through an advisor, brokerage house, agent, or another intermediary and in return the mutual fund company pays a commission to them.

A way of investing in mutual funds. Under SIP an investor can invest in mutual funds on a recurring basis instead of a lump sum basis. The frequency of these investments could be weekly, monthly or quarterly. The amount directly gets transferred from your bank account to the fund and based on the NAV per month sometimes you’d get more units or sometimes less. The best part about SIP is that you can benefit from this averaging system and invest as low as Rs. 1000 per month.

This is a plan offered by mutual funds which are on similar lines to an SIP. STP’s allow you to invest a lump sum in one scheme and regularly transfer a fixed or variable amount into another scheme.

And why would you do that?

In case you’ve invested in a debt fund because you think the markets are down. But you also feel this would be the best time to invest in an equity fund since share prices have dropped, but share prices drop further. Since you can’t exactly predict how low share prices can drop, STP’s protect you from such a situation by gradually helping you transfer from one scheme to another.

A systematic withdrawal plan is the opposite of SIP.  It allows the investor to withdraw a sum of money from their lump-sum investment in a fund at regular intervals just like getting a monthly salary.

Terms Associated With Types of Mutual Funds

Firstly, what does equity mean? When you buy part or whole of any company it is called as equity. The company could be a privately listed company or a publicly listed company. In privately listed companies only select people can buy the equity of that company but in a publicly listed company, the shares are listed on the stock exchange for everyone to buy and sell. The mutual fund scheme that solely invests in publicly listed equity companies is called as an equity mutual fund.

What is debt? It is the exact opposite of equity. In equity, you buy ownership of an asset or company but with debt, you LEND money to a company to start any project or business and in return, you get a periodic interest. The mutual fund scheme that solely invests in debt investments is called as a debt mutual fund.

When a mutual fund scheme invests in both debt and equity it is known as a hybrid fund. The proportion of how much money is invested in debt and how much in equity is decided as per the investors’ investment amount, risk level etc. But usually, it is at least 65% in equity and 35% in debt.

Schemes in where you can buy, sell and repurchase mutual fund units whenever you want based on the NAV are open-ended schemes. They don’t have a fixed maturity period like close-ended schemes.

Schemes in which you can invest only during the fund offer period. These have a pre-specified maturity period or a lock-in which means you can’t easily exit the scheme. After this period expires the scheme may either become open-ended or wind up its operations and return the investment to the investors.

Index funds are mutual fund units that invest in the exact same stocks as an index. So if you invest in these then you’re investing in the stocks that make up the index. You can buy these like you’d buy any mutual fund unit.

Exchange Traded Fund: On the other hand ETF are also just like index funds, they invest in the exact same stocks as an index. But they themselves are listed on the stock exchange. So you can buy and sell them like you buy stocks. Like mutual fund inception of sorts!

Actively managed fund: In such funds, the fund manager and its team make investment decisions based on their own research and expertise.
Passively managed fund: In such funds, the fund manager and its team mimic investment decisions of the index or the benchmark it represents.

Terms Related To Costs Of Mutual Funds

Think of NAV as the price at which you buy one unit of a mutual fund scheme. NAV is calculated daily because prices of securities that mutual funds invest in also fluctuate daily.

So after the value of all securities in a mutual fund portfolio is calculated, all the expenses incurred are deducted from it and it is divided by the number of mutual fund units held by different investors. That’s the NAV per unit.

Breaking this down: Let’s say 1000 people have invested in XYZ mutual fund. XYZ mutual fund has invested in 10 stocks and its expenses on fees, charges etc. are Rs. 500.  At the end of the day, the value of all those ten stocks is 10,000.

So NAV= 10,000-500/ 1000= Rs. 9.5

These are the fees charged by an AMC to manage your funds and are expressed as a percentage of your investment. They cover operating costs such as legal cost, administration cost, advertising cost and the management cost. Different mutual funds charge differently but SEBI has put some limits beyond which they cannot charge you. Example: The expense ratio is 1 percent and your investment is Rs 50,000, then Rs 500 is what you pay to the company as operating fee.

The commission or charge paid when an investor exits from a mutual fund. They are basically imposed to discourage withdrawals.


Are there any more terms that you’re confused about, comment and let us know. 

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