Investing in mutual funds comes with a lot of jargon that can be confusing. But don’t worry! This guide explains all the key terms in an easy way so you can understand them quickly.
1. Net Asset Value (NAV)
What it means: The price of one unit of a mutual fund.
Example: If a mutual fund has ₹10 lakh in total investments and has issued 1 lakh units, the NAV is ₹10 per unit. NAV changes daily based on market performance.
2. Expense Ratio
What it means: The fee charged by the mutual fund for managing your money.
Example: If you invest ₹10,000 in a fund with an expense ratio of 1.5%, ₹150 per year goes toward fund management fees. Lower expense ratios are better because they leave more money for you.
3. Fund Manager
What it means: The expert who decides where to invest your money.
Example: A fund manager is like a chef cooking a meal. They pick the right ingredients (stocks, bonds) and decide how much of each to use to get the best results.
4. Systematic Investment Plan (SIP)
What it means: Investing a fixed amount regularly instead of all at once.
Example: Just like paying a monthly Netflix subscription, you can invest ₹1,000 every month in a mutual fund. It helps build wealth over time without needing a large sum upfront.
5. Systematic Withdrawal Plan (SWP)
What it means: A method to withdraw a fixed amount from your mutual fund at regular intervals.
Example: If you set up an SWP for ₹5,000 per month, your mutual fund will deposit this amount into your bank account regularly, making it great for retirement income.
6. Compound Annual Growth Rate (CAGR)
What it means: The average annual return on your investment over time.
Example: If ₹10,000 grows to ₹15,000 in 3 years, CAGR tells you the average yearly growth rate of your investment. It helps compare different investment options.
7. Extended Internal Rate of Return (XIRR)
What it means: The return on your investment when you invest at different times (like through SIPs).
Example: If you invest ₹1,000 every month, XIRR helps calculate the actual return, considering each investment date.
8. Asset Allocation
What it means: How your money is divided across different investment types.
Example: If you have ₹10,000, you might put ₹6,000 in stocks (higher risk, higher return) and ₹4,000 in bonds (lower risk, stable return). This is asset allocation.
9. Exit Load
What it means: A penalty for withdrawing your money early from a mutual fund.
Example: If a mutual fund has a 1% exit load on withdrawals before one year, and you withdraw ₹50,000, you’ll pay ₹500 as a fee.
10. Growth vs. Dividend Option
- Growth Option: Profits are reinvested, making your wealth grow over time.
- Dividend Option: Profits are paid out as regular cash returns.
Example: If you plant a mango tree, the growth option means letting it grow bigger and bear more fruit, while the dividend option means picking mangoes regularly.
11. Equity Fund
What it means: A mutual fund that mainly invests in stocks.
Example: If you invest in an equity fund, your money is used to buy shares in companies like TCS, Infosys, or Reliance. These funds are riskier but can give higher returns over time.
12. Debt Fund
What it means: A mutual fund that invests in safe options like bonds and government securities.
Example: Debt funds are like fixed deposits—they provide stable but moderate returns with lower risk.
13. Hybrid Fund
What it means: A mix of both equity (stocks) and debt (bonds).
Example: If you want both growth and safety, hybrid funds offer a balance—like a diet that includes both healthy food and some treats!
14. Large-Cap, Mid-Cap, Small-Cap Funds
- Large-Cap Funds: Invest in big, well-established companies like TCS or HDFC. Stable but slower growth.
- Mid-Cap Funds: Invest in medium-sized companies with growth potential but more risk.
- Small-Cap Funds: Invest in small companies with high growth potential but high risk.
Example: Think of large-cap funds as old, established trees, mid-cap funds as growing plants, and small-cap funds as tiny seeds with potential to grow big.
15. Thematic & Sector Funds
- Sector Funds: Invest in one industry, like banking or IT.
- Thematic Funds: Invest based on themes like ESG (environment-friendly companies) or digital growth.
Example: If you believe electric vehicles are the future, you can invest in a thematic fund focused on green energy companies.
16. New Fund Offer (NFO)
What it means: A brand-new mutual fund that is launched for investors.
Example: Think of it as a new restaurant opening—early investors get in first, but they don’t know how good the food (returns) will be.
17. Benchmark Index
What it means: A standard used to measure the performance of a mutual fund.
Example: If your fund follows the NIFTY 50 index, it means it tries to match the performance of the top 50 companies in India.
18. Beta & Alpha
- Beta: Measures how much a fund’s returns move compared to the market. (Higher beta means more risk.)
- Alpha: Measures extra returns the fund gives compared to the market. (Higher alpha is better.)
Example: If a fund has an alpha of +2, it means it performed 2% better than the market average.
19. Portfolio Turnover Ratio
What it means: How frequently the fund manager buys and sells stocks in the fund.
Example: A high turnover ratio means frequent buying and selling, which could lead to higher costs.
20. AUM (Assets Under Management)
What it means: The total amount of money invested in a mutual fund.
Example: If a mutual fund has ₹5,000 crore in investments, its AUM is ₹5,000 crore.
Final Thoughts
Understanding these terms will make investing in mutual funds much easier. The more you know, the better decisions you can make for your financial future! 🚀
