investing

&
Mutual
funds
SIMPLIFIED
Financial knowledge series
part 3 of 26

essential UNDERSTANDING SOME BASIC

mf terms
TERMS COULD HELP YOU TAKE
INFORMED DECISIONS WHILE
INVESTING IN MUTUAL FUNDS.
here's a ready-reckoner

M
utual funds (MFs) are possibly one of the simplest LOAD
market-linked investment products when it comes Load refers to the charge or the cost which your investment
to meeting financial goals, whether it’s your in a mutual fund scheme is subjected to. At present, there is no
short-term needs or the long-term financial plans. entry cost for mutual funds, with the entire investment—
However, to make the best of what they have to offer, you including SIP transactions—deployed by the asset manage-
should understand some basic terms related to MFs. We take a ment company (AMC) on your behalf. This applies to both
look at five such important terms: investments made directly by you or through a distributor.
However, an exit load does apply and it varies with different
UNIT types of funds. Usually, equity funds come with 1 per cent load
Holding a unit in a mutual fund scheme is akin to owning one for exiting before one year of holding the investment. After a
share of a company. A holder of such units in any of the MF year, it is nil.
schemes is called a unit-holder. When you invest a certain
amount in an MF scheme, you are allotted a certain number RECURRING EXPENSES
of units, the value of which determines the worth of There is a recurring expense that keeps getting adjusted from
your investment. your fund value on a regular basis. This
is what your fund charges you for man-
NET ASSET VALUE (NAV)
Just as a share or bond is bought
NAV is a dynamic aging your money. Fund managers
have to be paid a fee, as do the other
and sold at a specific price, each ratio. The market constituents involved in managing
mutual fund unit is bought and your money. All this entails costs,
sold at its NAV. A scheme’s NAV is value of a which your scheme recovers from
its net assets (market value of the
securities it owns minus whatever
scheme’s portfo- you, within limits.
Every year, a fund charges some
it owes) divided by the number of lio changes day- amount to your scheme’s NAV, reduc-
units it has issued. If, for example,
you were to invest Rs 10,000 in a to-day, just as ing your returns by that much. While
rules allow equity schemes to charge a
scheme when its NAV is Rs 10, you
will be allotted 1,000 units
prices of shares maximum of 2.50 per cent of the cor-
pus as expenses every year, for debt
(10,000/10). However, NAV of a move up or down schemes, the maximum limit is
mutual fund is a dynamic concept. 2.25 per cent.
The market value of a scheme’s
portfolio changes day to day, just as prices of shares and bonds REDEMPTION
move up or down. The number of units outstanding also chang- You can sell your units, partly or fully, back to your fund
es as new investors come into the scheme and existing ones whenever you want. While it’s a sale from your point of view,
leave. If the NAV of your scheme rises from Rs 10 to Rs 11 over in mutual fund parlance, it is called ‘repurchase’ or ‘redemp-
a period of time, your scheme is said to have generated a return tion’. Your mutual fund will pay you the scheme’s NAV prevail-
of 10 per cent. The same principle applies to falling NAV. So, if ing on that date minus the exit load, if applicable, and directly
your scheme’s NAV falls from Rs 10 to Rs 9, it is said to have lost credit your nominated bank account in three days or send you
10 per cent. The NAV of any scheme tells us how much each the money through a cheque.;
unit is worth at any point in time and is, therefore, the simplest editor@outlookmoney.com
measure of how a scheme is performing. Next issue: how mutual funds work
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