Mutual Fund Terminologies & Key Concepts

Investing in mutual funds can be a powerful tool to grow your wealth—but only if you understand the terminology. Whether you're a beginner or a seasoned investor, here’s a detailed breakdown of essential mutual fund terms to help you navigate your investment journey confidently.

Key Concepts in Mutual Funds

1. Net Asset Value (NAV)

The NAV is the price per unit of a mutual fund. It is calculated daily and reflects the market value of all the securities in a fund’s portfolio, minus liabilities.

Formula: NAV = (Total Assets – Liabilities) / Total Number of Units

2. Systematic Investment Plan (SIP)

A SIP allows you to invest a fixed amount at regular intervals. It encourages discipline and benefits from rupee cost averaging and compounding.

3. Assets Under Management (AUM)

AUM refers to the total market value of assets that a mutual fund manages on behalf of investors. Higher AUM can imply better investor trust and scheme popularity.

4. Expense Ratio / Total Expense Ratio (TER)

This ratio represents the annual costs involved in managing a fund. Lower TER can lead to higher returns for investors.

Formula: TER = (Total Expenses / Total Net Assets) × 100

Risk & Return Indicators

5. Beta

Measures a fund’s volatility compared to the market. A beta <1 means lower volatility; >1 means higher risk.

6. Sharpe Ratio

Indicates risk-adjusted return. Higher Sharpe ratio = better returns for the level of risk taken.

7. Standard Deviation

Represents how much a fund's returns vary from the average. Higher deviation means more risk.

8. Alpha

Reflects how much better (or worse) a fund performed compared to its benchmark. Positive alpha = outperformance.

9. R-squared

Measures correlation with the benchmark index (0–100). High R² means fund performance mirrors benchmark closely.

Types of Mutual Fund Schemes

10. Equity Funds

Invest primarily in stocks. Aim for long-term capital appreciation.

11. Debt Funds

Invest in fixed-income securities like bonds. Offer stable but lower returns.

12. Hybrid Funds (Balanced Funds)

Mix of equity and debt to balance risk and returns.

13. Sector/Thematic Funds

Focused investments in specific sectors (e.g., pharma, banking). High risk, high return potential.

Charges & Loads

14. Entry Load & Exit Load

Charges applied when buying or redeeming mutual fund units. Many funds today have zero entry load.

15. Load-Free Funds

Schemes with no entry/exit load—preferred for cost efficiency.

Performance Metrics

16. Benchmark Index

Used to compare fund performance. Examples: Nifty 50, Sensex.

17. Yield to Maturity (YTM)

Estimated annual return on debt instruments if held till maturity.

18. CAGR (Compounded Annual Growth Rate)

Reflects the annual growth rate of investment over time.

Investment Tools & Features

19. SWP (Systematic Withdrawal Plan)

Allows investors to withdraw a fixed amount regularly.

20. STP (Systematic Transfer Plan)

Transfers a fixed amount from one fund to another (e.g., equity to debt) at intervals.

21. Trigger Facility

Auto-activation of predefined actions based on NAV, dates, or market movements.

Other Important Terms

• Consolidated Account Statement (CAS): Single monthly report of all mutual fund holdings.

• Fund Manager: The professional managing your mutual fund investments.

• Credit Quality: Crucial for debt funds—higher ratings imply lower risk.

• Index Funds: Passive funds that mirror a benchmark index.

• Gilt Funds: Invest in government securities only—ideal for low-risk investors.

  
  

Pro Tips for Investors

• Diversify your investments to spread risk.

• Keep an eye on expense ratios and taxation.

• Periodically review fund performance.

• Use tools like SIP calculators, mobile apps, and dashboards provided by AMCs.