Mutual funds plays the important role in the investment space. Now it become necessity to invest in mutual funds if one is looking for the good amount of sum after beating the inflation.
Before going to invest in mutual funds everyone needs to know the basic terms used in this fund arena. Making an investment needs complete understanding in which plan you are investing and what its associated terms depicts related to the fund.
Asset Management Company (AMC):
- AMC is the Asset Management company which manage the individuals money or assets to fulfill the one’s financial goals.
- These companies are responsible for taking the investment decision related to the fund they manage and should be SEBI registered.
- All mutual funds managing companies are known as AMC some examples are Axis Asset Management Company, HDFC Asset Management Company.
Net Asset Value (NAV):
- NAV is the net asset value which describe the unit price of a mutual fund, this is the price at which an investor purchase a unit of mutual fund or selling a unit of mutual fund.
- It is different from the stock prices which is listed on the stock exchange as it is not calculated in the market timings. We can only decide the NAV of a fund after closing of the market.
- NAV is calculated based on the sum of the total value of the shares hold in the portfolio by a mutual fund after subtracting the liabilities, divided by total no. of shares. This also can be called as a book value in terms of stocks.
NAV = (sum of the total value of the shares – Total cost of liabilities)/No. shares of the company hold
- Do not confuse with the fund having the cheap NAV value is better than the fund with higher value fund. It can be the same if the stocks hold in the portfolio is same.
Systematic Investment Plan (SIP):
- Systematic Investment Plan or SIP is a investment strategy where an investor can invest the particular amount of sum in periodic manner, it can be on monthly basis, quarterly basis etc.
- SIP is now gaining popularity because it helps in maintaining the mutual fund portfolio to be less risky by averaging the investment value in every rise and fall of the market.
- SIP can start with the minimum investment amount of Rs. 500, so it becomes easier for every income group person to invest in the mutual funds.
- There can be a penalty if the SIP is somehow missed whenever the due date is passed.
- A lump sum is another type of the investment strategy, in which an investor can invest the collected amount of sum in one go. There is no restriction on the sum to invest periodically, an investor can invest sum as per his/her convenience.
- A lump sum can be a bit risky as compared to SIP when the market falls there is no way to average it on the periodic basis.
- When going to invest on lump sum basis, the investment horizon should be for long term.
Load or Mutual Funds Fees:
- A load can be treated as a fee which is charged by the mutual funds’ companies in the form of commission or as a sale charge to compensate for distribution costs.
- There are two types of loads which are charged by the AMC, entry load and exit load.
- Entry load is charged at the time an investor purchases the units of a scheme. The entry load percentage is added to the prevailing NAV at the time of allotment of units.
- Exit load is charged at the time of redeeming (or transferring an investment between schemes). The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes)
Mostly, there is two scheme of funds types used in buying the mutual funds scheme:
- These types of funds/schemes are generally open from both of the ends. It means anytime an investor can invest a sum into it or sell out the invested sum.
- As such there is no maturity period assign to these schemes. We can also say this, these funds are liquid in nature which can be redeem or invested at any point of time.
- These types of funds/schemes have maturity period assign to them for e.g 3 – 5 years. These funds are open for buying or subscribe in the stipulated time frame.
- Investor can sell off their funds/scheme through the stock exchange listed price. This is true in case of only equity related funds, in case of premature of the debt funds investor need to pay the penalty for the same.
Every mutual fund scheme is divided into different investment types based on the individual’s ask to get the returns from these schemes:
Growth Investment – Direct/Regular:
- The growth investment is suitable for the investor who is looking for the capital appreciation over the long term keeping the financial goals in the mind.
- Investor can invest the sum in SIP or lumpsum basis to get the appreciated sum over the years.
- Direct is the plan in which the investor purchase a particular scheme, direct plan is to purchase the scheme directly from the mutual website.
- Direct Plan not incur any sales fee or commission from the investor.
- Regular Plan is opposite to the direct plan mutual fund purchasing, it incurs the fee from the investor in the form of sales charge or commission.
- Purchasing scheme through direct plan give more return as compared to Regular plan.
Dividend Investment – Direct/Regular:
- The dividend investment is suitable for the investor who wishes to receive regular cash payouts from his/her investments.
- In dividend option, the investor gets the extra scheme units in the form of dividend, which can be redeem by the investor after the particular interval of time, as these units are free or no sum pay by the investor fr these units.
- Dividend investment option is good for the person which are getting steady income in his/her retirement period.
- Same in case of the Growth Investment, the investor invest the sum in the form of SIP or lumpsum amount.
- Direct and Regular plan is similar as discussed in the Growth option above.
- Every mutual fund follows a particular benchmark, and invest their money in the companies which are associated with its benchmark.
- Benchmark is the standard against which the performance of the mutual funds schemes measured.
- Checking the mutual fund benchmark is one of the selection criteria of the mutual fund schemes.
- The common benchmark are S&P BSE 200,S&P BSE 100 etc.
Mutual fund Comparison with its benchmark (BSE 200)
- Every mutual funds have the minimum investment amount decided if the investor go with lumpsum option to invest in a particular scheme.
- The minimum amount can be started from Rs.5000, Rs.10000 etc.
- Investor who are opt for the SIP basis, do not consider the minimum investment. They can start with minimum of Rs.500 per month to start investing in any scheme.
- Fund Manager is the investment professional who is responsible to take care the fund’s portfolio.
- Fund Manager have control to decide when to buy or sell any stock or other investment related instruments. So it is important to know about the fund manager profile and other investment he/she carried out by judging the performance of the different funds.
- Credit Rating Information Services of India Limited, is the analytical company which provides the ratings, research, risk and policies related advisory services.
- Below rating symbols decided how the investment instrument is in terms of safety, service and obligation.
Rating scale for Long-Term Instruments
Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
(Very High Risk)
Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
Instruments with this rating are in default or are expected to be in default soon.
So, before opt for any of the investment look out for the above terms used by the fund company and then decide which one you decide to go for investment. Very soon we are also going to write a blog on how to choose the mutual funds.
So stay tune and comment us for any other investment term you want to include in this blog.
Financial Freedom Enthusiast
Spend 6 years in learning Stocks & Mutual funds Investment. A traveler from soul, finance is passion, Investment is hobby.