Mutual funds are a great way to invest money for any individual even if they have no experience previously investing. However, as a novice it is extremely important for you to understand some of the frequently used mutual fund jargons. This will help you get a deeper understanding of the working of the industry. It makes browsing the website of mutual funds, reading their scheme related document, and selecting the most appropriate funds much easier and faster. Some of the widely known jargons and terminologies used in mutual funds are:

⮚ Benchmark: Benchmark is an index which is used to measure a Mutual Fund’s overall performance. It provides a value of how much one’s investment should have ideally earned; versus how much it has earned. Funds that outperform provide higher returns than the benchmark, whereas funds that underperform provide lower returns than its benchmark value. Ideally, an investor should invest in mutual funds that have matched or exceeded the benchmark return in the last few years.
Benchmark in Mutual Funds thus provides an established platform to compare one’s returns. For example, if an equity oriented mutual fund is benchmarked against Sensex, its return can be compared with the performance of Sensex.

⮚ NAV: The Net Asset Value is the price of each unit of the mutual fund. Since funds are made up of different listed securities, this amount is calculated at the end of each day based on the sum of all securities that are included in that mutual fund. It is calculated by adding all the funds’ assets and subtracting the liabilities and expenses. This net amount is then divided by total sold units to get the NAV.

⮚ Expense ratio: The expense ratio or management expense ratio is the annual fee that an investor is charged by the mutual funds for managing his or her funds. It includes annual operating costs, including management fees, allocation charges, advertising costs, etc. of the fund. A simple formula for expense ratio is the total fund cost divided by the total fund assets. An investor should always check the expense ratio of any mutual fund scheme he/she invests in. A higher expense ratio will reduce the net return of the investor.

⮚ Debt/ Fixed Income instrument: Debt/Fixed Income investing involves investing money for a pre-decided period and getting interest monthly, quarterly, or semi-annually till the completion of such period. There are various types of debt instruments like bonds, certificates of deposits, debentures, government securities or National Saving Certificates. They are less risky than equity, and the invested amount is repaid at the end of the period. This allows you to either invest on a short term or long-term basis your goals. For example, one may invest in a bond for 1 year, 5 years and so on depending on when you would need the principal amount back.

⮚ Asset allocation: Asset allocation means splitting the money one decides to invest into various asset categories like stocks, bonds, cash, gold etc. These investments are made keeping in mind the investors risk appetite and return goals. If your asset is allocated appropriately, it will balance your risk and return and allow you to invest in funds that match your long term and short-term goals. For example, if you are planning a comfortable retirement after 10 years or a personal vehicle in 3 years you need to allocate your assets according to the same period of your goals.

Investing your money through a mutual fund has several advantages and benefits. Your money is managed by professional fund managers and highly qualified analysts. These funds are simple and easy to invest in and offer numerous options for investment so do not get discouraged by the investing jargon and aim to make the most of your investment by investing in mutual funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.