Key Terms Every Mutual Fund Investor Should Know

Given the jargon, investing in mutual funds can seem daunting. As a beginner, understanding the mutual funds basics and key terms associated with it is important to make informed investment decisions. This blog post explains some of the most common mutual fund terms every investor should know.

Glossary of Mutual Funds Terms

This glossary explains common mutual fund terms and concepts in simple language.

• Equity Funds: Equity funds are one of the most common mutual fund terms that invest primarily in stocks with the aim of capital appreciation over the long term. They can be sector-specific or diversified. The risk is higher with equity funds.
  
• Debt Funds: Debt funds invest in fixed-income securities like bonds, government securities, etc. Debt funds generally have lower risk with steady returns.
  
• Hybrid Funds: Hybrid funds invest in a mix of equities and debt. Hybrid funds have moderate risk and moderate returns.
  
• Index Funds: Index funds aim to mimic the returns of a market index like the Nifty 50 or Sensex. They have lower costs as no active fund management is required.
• Liquid Funds: Liquid funds are invested in very short-term debt instruments. Liquid funds have low risk and easy liquidity. They are meant for temporary cash parking.
• Net Asset Value (NAV): The value per unit of the mutual fund scheme. Calculated daily by deducting expenses from total assets. Indicates the price to buy/sell units.
  
• Expense Ratio: Annual fee charged by the fund as a percentage of assets under management to cover operating costs. A lower expense ratio is better for investors.
  
• Entry and Exit Loads: One-time fees charged on the purchase (entry) or sale (exit) of mutual fund units within a specific period. However, please avoid short-term trades.
  
• Fund Factsheet: A snapshot of key details about the mutual fund scheme, such as objective, portfolio, returns, fees, risks, etc., that helps evaluate suitability.
  
• Annual Returns: It is a common mutual funds concept of percentage gain or loss in the NAV over the previous year, which indicates the fund’s performance versus its own past record and other similar funds.
  
• Sharpe Ratio: Measure of fund’s returns relative to the total risk taken. A higher ratio indicates better risk-adjusted returns.
  
• Standard Deviation: It is a metric that measures how much a fund’s returns fluctuate from the average. A higher deviation means higher volatility.

• SIP: Systematic investment plan where you invest fixed amounts regularly in a mutual fund. It helps disciplined investing and rupee cost averaging.
  
• Risk Profile: Indicates the level of risk taken by a fund scheme based on underlying assets and strategy—low, moderate, or high.
  
• SWP (Systematic Withdrawal Plan): This is a facility for redeeming fixed amounts periodically from investments to generate regular income.
  
• STP (Systematic Transfer Plan): This plan allows you to periodically transfer fixed amounts between mutual fund schemes to rebalance your portfolio.
  
• AUM (Assets Under Management): Total market value of investments managed by the fund scheme at any given time.
  
• AMC (Asset Management Company): A company that professionally manages the investments and operations of a mutual fund scheme.

Conclusion 

While the list is not exhaustive, understanding the basic mutual funds concept will lead to better-informed investment decisions aligned with your financial goals and risk tolerance. Don’t get intimidated by the investment terms or jargon – with a little reading up, mutual funds are not difficult to comprehend.

When you are ready to invest in mutual funds, you can unlock their value instantly without selling them. Fibe provides Loan Against Mutual Funds at competitive rates so you can meet your cash needs while continuing to benefit from your investments. With Fibe Loan Against Mutual Funds, keep your fund investments intact while getting access to liquidity.

FAQs 

What is the 3-5-10 rule for mutual funds?

The 3-5-10 rule is a simple guideline recommended for investing in equity mutual funds. It suggests having a minimum investment horizon of 3 years, investing for at least 5 years, and ideally staying invested for 10 years or more. This allows your investments sufficient time to ride out short-term market volatility and benefit from long-term compounding.

What are the 4 Ps of mutual funds?

The 4 Ps stand for People, Philosophy, Process and Predictability. They allow an investor to make an informed choice of a mutual fund scheme well-aligned to one’s financial objectives. People refer to the expertise and experience of the fund management team. Philosophy examines the investment principles guiding the fund’s strategy. Process evaluates the investment approach, research, and risk analysis followed. Finally, Predictability reveals how consistent the fund’s performance is across different market conditions.

What is PE and PB in mutual funds?

PE and PB are common investment terms that refer to the Price-to-Earnings ratio and Price-to-Book ratio. PE helps determine if a fund’s underlying stocks are overvalued or undervalued compared to their earnings growth. The PB ratio compares the market price of the stocks against their book value to identify under or overvaluation. Analysing PE and PB ratios enables assessing the right valuation of the portfolio stocks.