Terms to be known:
Units – Units represent the extent of ownership in a mutual fund.
NAV (Net asset value) – It is the current market price per unit of a fund.
Redemption – It is liquidation /selling of your units to the AMC.
Entry Load – It is a percentage of fee levied on purchase of a mutual fund. SEBI has abolished entry load
Exit Load – It is levied as a percentage, when investor wishes to exit or redeem the mutual fund.
AMC (Asset management company) – The company which manages the assets of a mutual fund.
Corpus – It represents total amount invested in that particular fund.
CAGR (Compound annual growth rate) – The Year over Year (YoY) compounded growth rate since
AUM (Asset under management) – It is market value of all funds managed by AMC.
SIP (Systematic investment plan) – It is a method by which you can invest in mutual funds through
SWP (Systematic withdrawal plan) – It is a facility that allows you to withdraw money from an existing
mutual fund at predetermined intervals.
Market Capitalisation: The value of the a particular Company in terms of total value of a Company.
Kinds of Mutual Funds
At any time during the period of the fund, investors can enter and exit the fund (by buying /redeeming fund units) at its NAV. Here units are being bought and redeemed back from the fund. So, various risks like default, liquidity etc. do not exist. These are not listed in the stock exchange.
These are listed on the stock exchanges and investors can buy/ sell units in the secondary market. Here units are not being bought and sold from the fund but from another investor so various risks like liquidity (finding a buyer), default etc. exists.
Types of NAV
Investors who are not aware of various investment options or do not have sound knowledge of investing get the services of distributors or agents for sound advice, pre-filling certain forms, assisting with redemptions, etc. Investing through distributors or agents attracts regular NAV as it bears the extra cost of service of distributors or agents.
Investors investing directly with the mutual fund house without the service of any agents or distributors will be eligible to avail the direct NAV plans. The direct NAV will be higher than the regular NAV, although the scheme would be the same. Under the direct NAV plan there will be no distribution charges. It will cost less to hold funds in the direct plan, as the expense ratio is expected to be cheaper. For investors who have a decent knowledge of the investment options, do not require servicing of distributors and with adequate time to identify and monitor mutual funds; the direct plan would be beneficial as it would earn higher returns.
Growth option & Dividend option in Mutual Funds
Under this option you do not receive any intermediate returns in the form of dividends. However the gains are reinvested back and this rises the NAV over a period of time. This option can be preferred if you are investing for long term as you will get the benefit of compounding on dividends and also the dividend distribution tax which the company deducts if dividend is distributed is saved and would enhance the NAV.
Under this option investor receives returns at periodic intervals in the form of dividends. However, the intervals are not certain and dividend amount is also not fixed. Though dividend received in the hands of investor is tax free, the company deducts dividend distribution tax on the dividends paid. This option can be preferred if you are investing for short term.
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