Before you start investing in mutual funds, it is essential to understand the basic concepts and terms involved thoroughly. 15 such basic terms are explained in this post. Keep reading.

The extensive range of mutual funds has made them a sought-after investment choice among investors with varying objectives, risk appetites, and tenures.

But while investing in mutual funds is now easier than ever, mastering the concept of mutual funds and their working is imperative to making informed decisions and achieving investment objectives.

To help you begin, here’s a brief explanation of some concepts and terms used in mutual funds-

15 Basic Mutual Fund Terms and Concepts

1. Net Asset Value (NAV)

The NAV is the price of a single mutual fund unit at which it can be bought and sold on any given day. It is calculated by dividing the total net assets of a scheme by the total number of units issued. As the market value of the securities held by a scheme fluctuates daily, the NAV also changes every day.

2. Assets Under Management (AUM)

Investors should check the scheme's AUM before investing. It is the current value of all the assets held by a mutual fund scheme. So, a scheme with a higher AUM generally indicates a more significant client base and higher trust among investors.

3. Growth Option

While investing in mutual funds, you can choose between growth and dividend options. If you go with the growth option, the IDCW (Income Distribution cum Capital Withdrawal) is re-invested to generate higher returns and not distributed among the investors.

The re-investment reflects in the scheme's NAV, due to which the growth option of a scheme has a higher NAV than the dividend option.

4. Dividend or IDCW Option

As per the SEBI norms, dividend plans have been renamed to ‘Pay-out of IDCW’ from April 2021. If you select this option, you’re entitled to receive IDCW from the scheme if it makes any gains. However, IDCW payments are not fixed and depend on scheme performance.

5. Asset Allocation

One of the most vital mutual fund basic concepts is asset allocation. It is an investment strategy deployed by the fund managers to divide the investments into various assets per the scheme's objective.

For instance, if it is a conservative hybrid fund, 10%-25% of the scheme assets would be allocated to equity and equity-related instruments, while 75%-90% would be reserved for debt instruments.

6. SIP (Systematic Investment Plan)

With SIP, investors get to invest a fixed amount in the mutual fund scheme of their choice regularly. You can start a monthly, quarterly, half-yearly, or yearly SIP. With most schemes, the minimum SIP amount is Rs. 500 or Rs. 1,000.

Also Read – SIP Full Form

7. STP (Systematic Transfer Plan)

STP allows investors to transfer the invested amount between their preferred schemes regularly. For instance, if you invest Rs. 10 lakhs in an equity scheme, you can use the STP option to transfer, say, ₹50,000 every month to a debt scheme of the same fund house.

8. SWP (Systematic Withdrawal Plan)

Like SIP allows you to invest systematically, SWP enables systematic withdrawals. You can use it to withdraw a fixed amount from your mutual fund investment regularly.

9. NFO (New Fund Offer)

Like stocks have IPO (Initial Public Offering), mutual fund schemes have NFO. When a new mutual fund scheme is launched through an NFO, investors can subscribe to the scheme at the offer price for a specified duration. Once the NFO is over, investors can invest in the scheme at its current NAV.

10. FMP (Fixed Maturity Plan)

FMPs are close-ended debt schemes that build an investment portfolio with maturity matching the scheme's tenure. But as these are close-ended schemes, they're only open to new investments for a specific duration.

11. Benchmark Index

Mutual fund schemes have a benchmark index against which their performance is compared. For instance, large-cap equity schemes generally have NSE Nifty or BSE Sensex as their underlying benchmark. 12.

12. Exit Load

When discussing important mutual fund terms, the term ‘Exit Load’ cannot be left behind as it can impact the returns you generate from the investment. Fund houses charge a fee if the investor redeems a fund within a specified period partially or wholly.

This period is mentioned in the Scheme Information Document of a scheme. But note that all the mutual fund schemes do not have exit loads. Moreover, the rates also vary between schemes that charge these loads.

Also Read - Exit Load in Mutual Fund: Meaning, Types, and Calculation

13. AMC (Asset Management Company)

The AMC is a company that offers mutual fund schemes. In India, every AMC must register with SEBI before starting their operations.

14. Portfolio

The portfolio is basically a collection of assets. So, if we talk about a mutual fund scheme, its portfolio will include all the different instruments/securities in which it has invested. The schemes have a fund manager responsible for building and managing the portfolio as per the scheme’s objectives.

15. Rupee Cost Averaging (RCA)

RCA is a popular investment strategy where you keep investing at regular intervals irrespective of the security price. This practice of regular investments across market cycles helps average out the cost of each unit.

Ready to Invest in Mutual Funds?

It is only when you master the basic terms in mutual funds that you can move to more advanced topics and become an informed and savvy investor.

While some of the most important terms and concepts are explained above, continue learning and improving your investment skills to get closer to your financial objectives. Moreover, if you’re new to mutual funds and still learning, you can consult an investment advisor to get all the assistance you need.

Also Read - How to Choose a Mutual Fund?

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