When talking about mutual funds, a lot of jargon is spewed.
Here's to understanding what all these terms mean.
Let's first start with the absolute basic: what a mutual fund is.
Mutual fund
Simply put, a mutual fund pools together money from a number of investors, uses professionals to manage and invest it with the aim of achieving a return.
The mutual funds industry is regulated by the Securities and Exchange Board of India (SEBI)
A different kind of mutual fund is AMC
An Asset Management Company is the fund house, or the company that manages the money.
The mutual fund itself is a trust registered under the Indian Trust Act, and is initiated by a sponsor. The sponsor is the person who acts alone or with another corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund.
For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fund.
ABN AMRO Asset Management (India) Limited is appointed as its investment manager.
Various schemes or individual funds with different objectives can be floated under the umbrella of one parent.
So, ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund and are managed by the ABN AMRO AMC.
Fund investors: Check your tax implication
ELSS
Equity Linked Saving Schemes are diversified equity mutual funds (funds that invest in the shares of various companies of various sectors) with a tax benefit.
To avail of the tax benefit, your money must be locked up for at least three years.
The tax benefit for these schemes falls under Section 80C.
NFO
A New Fund Offering is the term given to a new mutual fund scheme. During the launch period, fund investors can buy units for Rs 10 each.
How to invest in a mutual fund
NAV
The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall.
Load
This is a fee charged when you buy or sell the units of a fund.
When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load.
Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund.
Now, let's assume you are selling the units of your fund. And the Rs 10,000 you invested initially is now Rs 15,000. Let's further assume that the exit load is 2%. So you pay Rs 300 and get back Rs 14,700.
Generally, if funds charge an entry load, they will not charge an exit load. Or vice versa. Only one of the loads is charged.
The load is a percentage of the NAV.
Will following a fund manager make me rich?
SIP
A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units.
Let's say that every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund.
If the NAV on the day you invest in the first month is Rs 20, you will get 50 units.
The next month, the NAV is Rs 25. You will get 40 units.
The following month, the NAV is Rs 18. You will get 55.56 units.
So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.
