Today we are here to share one consolidated detail list of major term use in mutual funds investment for our readers to make informed decisions while making any kind of investment in mutual funds,So here are some key information and definitions of terms used in mutual funds for investment education:
1. Mutual Fund: A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a variety of securities such as stocks, bonds, and money market instruments.
2. Net Asset Value (NAV): The NAV is the per-share value of a mutual fund. It is calculated by subtracting the fund’s liabilities from its assets and dividing the result by the number of outstanding shares.
3. Asset Allocation: Asset allocation refers to the process of dividing a portfolio’s investments among different asset classes, such as stocks, bonds, and cash equivalents. This is done to achieve a balance between risk and return.
4. Diversification: Diversification is the practice of spreading investments across different assets and industries to reduce risk. This is done to avoid overexposure to any single stock or sector.
5. Expense Ratio: The expense ratio is the annual fee charged by a mutual fund for managing its assets. It is expressed as a percentage of the fund’s assets and includes all management fees, administrative expenses, and other costs.
6. Load and No-load Funds: A load fund is a mutual fund that charges a sales commission or load when you buy or sell shares. A no-load fund, on the other hand, does not charge a sales commission and is therefore less expensive.
7. Index Funds: Index funds are mutual funds that track a specific market index, such as the S&P 500. They are designed to replicate the performance of the index and are a popular choice for passive investors.
8. Active Funds: Active funds are mutual funds that are managed by a portfolio manager who selects individual securities to buy and sell with the aim of outperforming the market. These funds tend to be more expensive than index funds.
9. Fund Manager: The fund manager is the person responsible for managing the mutual fund’s investments. They are responsible for making investment decisions based on the fund’s investment objectives and strategy.
10. Prospectus: The prospectus is a legal document that provides detailed information about a mutual fund, including its investment objectives, strategy, fees, and risks. It is important to read the prospectus carefully before investing in a mutual fund.
11. Systematic Investment Plan (SIP): A SIP is a disciplined approach to investing in mutual funds where you invest a fixed amount of money at regular intervals (usually monthly). This helps you to invest regularly and average out the cost of your investments over time.
12. Step-up SIP: A step-up SIP is a variant of the SIP where you increase the amount of your investment periodically (such as annually or bi-annually) to take advantage of increasing income or to keep pace with inflation.
13. Open-ended Funds: An open-ended mutual fund is one that does not have a fixed maturity date and allows investors to buy or sell units at any time. The number of units in an open-ended fund varies based on the demand and supply of the units.
14. Closed-ended Funds: A closed-ended mutual fund has a fixed number of units that are issued during the initial offering and are then traded on the stock exchange like shares. These funds have a fixed maturity date, after which the units can be redeemed by the investors.
15. Fund of Funds (FoF): A Fund of Funds is a mutual fund that invests in other mutual funds rather than investing directly in stocks or bonds. FoFs provide diversification and professional management to investors who may not have the time or expertise to select individual funds.
16. Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds, but they are traded like stocks on an exchange. They track a specific index or sector and offer low expenses, liquidity, and flexibility to investors.
17. Sectoral Funds: Sectoral funds invest in stocks of companies within a specific sector, such as technology, healthcare, or banking. These funds are considered high-risk investments because they are dependent on the performance of a single sector.
18. Liquid Funds: Liquid funds are a type of mutual fund that invests in short-term money market instruments such as treasury bills, commercial paper, and certificates of deposit. They provide liquidity and safety to investors and are a good option for short-term investments.
19. Exit Load: An exit load is a fee charged by a mutual fund when you sell your units before a specified period (usually one year). The purpose of the exit load is to discourage short-term trading and encourage long-term investment.
20. Long-term Capital Gains (LTCG) Tax: When you sell your mutual fund units after holding them for more than one year, you may be subject to a long-term capital gains tax. As per the current tax laws in India, LTCG tax on equity mutual funds is 10% on gains exceeding Rs. 1 lakh in a financial year, and for debt mutual funds, it is 20% with indexation benefit.
21. Short-term Capital Gains (STCG) Tax: When you sell your mutual fund units before holding them for one year, you may be subject to a short-term capital gains tax. As per the current tax laws in India, STCG tax on equity mutual funds is 15%, and for debt mutual funds, it is taxed as per your income tax slab.
22. Lumpsum Investment: A lumpsum investment is when you invest a large amount of money in a mutual fund in one go. This is different from a SIP, where you invest a fixed amount of money at regular intervals. A lumpsum investment can be beneficial when the market is low and can help you take advantage of market opportunities.
23. Association of Mutual Funds in India (AMFI): AMFI is a self-regulatory organization (SRO) that represents the mutual fund industry in India. It was established in 1995 and is responsible for regulating and promoting the mutual fund industry in India.
24. Asset Management Company (AMC): An AMC is a company that manages and operates mutual funds. The AMC is responsible for managing the portfolio of the mutual fund, ensuring compliance with regulations, and providing investor services.
25. Assets Under Management (AUM): AUM is the total market value of all the assets that a mutual fund manages on behalf of its investors. The AUM is an important metric that reflects the size and performance of a mutual fund.
By understanding these key terms and concepts is essential for making informed investment decisions based on their goals, risk appetite, investment horizon, and tax implications in mutual funds. By doing so, investors can build a diversified portfolio that meets their investment goals and risk tolerance while minimizing costs and maximizing returns.