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    1. 1443442
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    1. 1443442
    2. -1000.56
    3. 30000 %
  • BSE SENSEX
    1. 1443442
    2. -1000.56
    3. 30000 %
  • BSE SENSEX
    1. 1443442
    2. -1000.56
    3. 30000 %
  • BSE SENSEX
    1. 1443442
    2. -1000.56
    3. 30000 %
  • Last Update:09 Nov,2017
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Mutual Funds Terms

Mutual funds are an ideal investment method in which an investor can choose to invest in a fund and asset of his choice, be it equity debt or gold. These funds, managed professionally by financial experts, help you to create wealth in a tax-friendly manner.

But when we visit any website of Asset Management Company (AMC), we find different terms and jargons that are at times hard to comprehend. So, let's go through the terms below to get a clearer insight and comprehension of the mutual fund universe

AMC - Asset Management

The Asset Management Company manages individuals' funds. A mutual fund is an Indian Trust Act registered a trust. A sponsor initiates it. A sponsor is individual acting alone or with a business to set up a mutual fund. Then the sponsor appoints an AMC to handle the fund's investment, marketing, accounting, and other tasks. Depending on the investment goal, different funds can be introduced by a single AMC. It is a pool where funds are professionally collected and invested and yields are distributed proportionally.

In India, before commencing operations, all AMCs are needed to register with SEBI.

Asset Allocation

The asset allocation consists of a combination of equity, fixed interest, and cash or cash equivalents. The distribution of the assets of each fund relies on the fund's type and purpose. The fund manager, therefore, decides on the asset combination. Pure equity funds, balanced funds, debt funds, money market funds, etc. may be available. For the investor to understand the allocation of the assets to funds, the offer, and the fund information can be read before investing to make the correct decision of risk and investment goals.

AUM - Asset under Management

Asset Under management refers to the complete amount of investors controlled by the AMC. These AMCs handle the total size of the assets for their customers. An AUM of an AMC represents the sum of the total assets held less their debt. These funds are used for transactions and purchases of stocks, bonds, etc. on behalf of the customer once the customer contributes, his money may be used by the manager without his consent to purchase or sell the stocks of his fund. Due to new investments and daily restructuring, AUM is still fluctuating. AUM is one of the largest AMC customer attraction parameters. The bigger the AUM, the more the trust and the results of the AMC represents the shareholders. If the AUM is too small and too new, individuals are skeptical about investing.

Balanced Funds

Balanced funds are mutual funds which combine (or balance) the underlying assets such as stocks, bonds, and money. Also known as hybrid funds or asset allocation funds, the asset distribution stays comparatively fluid and serves a specified objective or style of investment, a conservative balanced fund might, for instance, invest in a conservative asset combination such as 40 percent of shares, 50 percent of bonds and 10 percent of the cash market.

Benchmark Index

The good, better or best performance can be established only if there is an instrument to compare two things. Similarly, if a fund is good or not it can only be said if we compare it with a basic benchmark. The BSE-Sensex or NSE-Nifty is generally compared with a pure large-cap capital fund. If Sensex and Nifty produced a 10 percent return in the same period, whereas the fund was prepared to offer a 12 percent return, the fund is said to have exceeded its benchmark index and is a performance fund. All funds must be compared to either equity or a bond benchmark index. Before investing, a person should always know the efficiency of the Fund in line with its benchmark.

Dividend Option

The dividend option in a scheme means that intermediate payments in the form of dividends will be made to the investor. The payment rate and time are not pre-fixed, but it entirely depends on the performance of the fund. If NAV of the fund increases from Rs.11 to Rs.13, investors can then receive a dividend of Rs.1.5. NAV would decrease to Rs.11.5 from Rs.13 after the dividend payment.

Two subsections exist - pay-out dividends and reinvestment dividends. In dividend payout, the investor receives dividends in the form of a cash payout, but no cash is paid in the latter option, instead, the dividends are reinvested and additional units are bought and credited to the investor account.

This option is best suited for investors seeking short-term investment because dividends are not taxable in the investor's hands, although the fund pays a dividend distribution tax.

Last Words

STP is one of the most reliable approaches an investor can take to reduce risk. They can't eradicate risks, though. If the market is low, you can also expect a drop in returns.

Go for STP only if you have to spend a lump sum that you may not need soon. In brief, STP is a helpful risk management strategy without having a major impact on your returns.

Expense Ratio

Even if the investor uses a no-load fund, the underlying costs in the operation of the fund are indirect fees for use. The expense ratio is the proportion of charges paid to handle and run the fund by the mutual fund company, including all administrative and 12b-1 fees. Before the investor sees the return, the mutual fund firm would take those costs out of the fund. For instance, if a mutual fund's expense ratio was 1.00 percent and you invested Rs.10, 000, it would cost Rs.100 for a specified year.

The expense is not taken out of your pocket, however. The cost-efficiently decreases the fund's gross return. In other words, if the fund earns 10% before expenses, the shareholder would see a net return of 9.00% (10.00%-1.00%) in a specified year.

Growth Option

Mutual funds come with a choice for growth and dividend. Whatever interests, bonuses, profits and dividends the fund earnings are not paid out or shared among the investors under the growth option. It is plowed back into the scheme itself and reinvested. This is reflected in the scheme's NAV, no provisional payments are produced from the fund holdings whatsoever.

The investor receives the return only after the fund has been redeemed. The NAV of the same scheme's growth option and dividend option differs greatly. The growth option NAV is much greater than the dividend option because there are no payouts.

If you opt for a mutual fund based on equity then the growth option is quite appropriate for the creation of wealth. Since no provisional payments are made, the investor enjoys the advantage of compounding.

And long-term capital gains from equity investment are also non-taxable from a tax view. But if the fund is redeemed within one year, the tax rate will apply as per the present tax slab of the investor.

Market Capitalization

Market capitalization (or market cap) of investment securities relates to the cost of a stock share multiplied by the number of excellent shares. Many equity mutual funds are classified based on the stocks owned by the mutual funds' average market capitalization. This is essential because investors need to be certain about what they are purchasing.

Large-cap Stock Funds invest in large-market capitalized corporate stocks (top 100 companies). These businesses are so big that you may have heard of them, or you may even regularly buy products or services from them.

Mid-cap Stock Funds invest in mid-size capitalization corporate stocks, typically among the top 250 excluding the top 100 (ranked 101-250 according to their market capitalization).

Small-cap Stock Funds invest in small-scale capitalization corporate stocks, typically ranked 251 and beyond of all listed companies in the stock exchange.

NAV - Net Asset Value

In a layman's language, it is the mutual fund's price per share or unit. Since stocks have a share price, NAV is provided for mutual funds. When we buy 100 units of a mutual fund, we purchase them at their NAV. While the price of the share fluctuates on exchanges throughout the day, NAV does not change. At the end of the trading day, NAV of the fund is calculated. Therefore, if a request is received before 15:00 hour’s cut-off, any purchase or sale by an individual is performed on the current day's NAV, while the next day's NAV would apply if the request were received after the market is closed.

NFO - New Fund Offer

New Fund Offer is like any company's IPO. It is an offer to raise capital for a particular scheme made to the public. The offer is open for a specified time at a usually Rs.10 unit price. Anyone who intends to opt for the fund can only do this at the NAV after the offer is closed. Whenever an AMC launches a new scheme, NFO route is used to raise public capital to buy equity, bonds, etc.

SIP - Systematic Investment Plan

This is the option of the Systematic Investment Plan and one of the preferred terms of the representative of the mutual funds. SIP gives investors the freedom to invest monthly in a scheme with as little as Rs.500 per month as recurring bank deposits. Fresh units are purchased each month with the investor's monthly payments at the day's prevailing NAV on the date chosen by the investor. The amount will be automatically deducted from the investor's bank account. An ECS mandate with bank details, amount and specified date must be submitted at the time of investment. This saves the investor's time and trouble every month from remembering the date. The rupee cost average mechanism helps him buy units at various NAVs. He gets higher units if the market falls and if the market rises he makes money on all the previously purchased units.

STP - Systematic Transfer Plan

Systematic Transfer Plan provides the investor with leverage for disciplined use of his funds. Say someone decides to invest 10 lakh rupees in the equity mutual fund, then instead of investing one go, they can put the whole amount into the same fund house's debt fund and opt for STP. In this case, a predetermined sum is transferred to the equity fund every month or week as he decides. The entire amount is transferred over some time to the equity fund to protect the investor from market volatility. It's pretty flexible. After a while, say 5 years again if one feels he's accumulated enough in the equity fund he can choose STP from the equity fund to the debt fund.

SWP - Systematic Withdrawal Plan Recommended

As the name suggests, the systematic withdrawal plan provides an option for investors to withdraw their accumulated funds over a while. It can also be used as an individual pension. For example, a person starts SIP with a meager sum of Rs.5000 a month at the age of 30 and continues to invest until the age of 60; his investment would be Rs.18 Lakhs, while the accumulated wealth would be Rs.1.5 crore at a CAGR of 12 percent. From here, at a predetermined date, he may choose to withdraw a monthly predetermined amount. It would be as good as receiving a monthly pension.


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