Mutual funds are considered one of the best types of investment that you can do for the long-term compared to traditional methods of investment. New investors join the market every day. However, the complex jargon can often make it complicated for many to understand the basics.
NAV or Net Asset Value is the value of one unit in the mutual fund scheme and measures the fund’s performance. It is calculated by dividing Asset Under Management (AUM) of the fund by the number of units left on any specific date. Since the value of securities varies daily, the NAV also varies. However, a NAV should not be the only deciding factor for investing in a mutual fund scheme. It would help if you chose based on the fund’s objective, investment theme, type of stocks, and your financial goals.
Note: If the NAV of your product is more than you purchased it at, then it means you are in profit. AUM (Assets Under Management) is the total market value of all assets held by the mutual fund, such as bonds, derivatives, futures, options, stocks, cash, gold, real estate, etc.
SIP or Systematic Investment Plan is more like a recurring bank account. It is a way to invest in your mutual funds systematically. In a SIP, you need to pay a fixed amount of money at a specific interval. This interval can be weekly, monthly, or quarterly.
SIP helps you build the corpus in an affordable, disciplined way and provides you with the benefit of rupee cost averaging and the power of compounding!
Expense Ratio is the amount charged by mutual funds for managing your money. It is the expense involved in handling a mutual fund and can vary according to the type of the fund. The charges include fund management cost, legal cost, administrative costs, custodial cost, etc. According to SEBI’s regulations, there is a cap on the maximum amount of expense ratio that a mutual fund can charge, which varies from equity to debt. Expense Ratio = Operational Costs/ Average Value of Fund Assets
In Mutual Funds, the lock-in period refers to the period when the investor is not allowed to redeem any money from the fund. In India, the lock-in period is not a familiar concept for most mutual funds. However, the Equity Linked Savings Scheme (ELSS) is one exception in the category of open-ended schemes. ELSS are tax-saving mutual funds and come with a lock-in period of 3 years.
Exit Load in mutual funds refers to a fee charged if an investor exits a scheme partially or wholly within a specific period from the investment date. This amount is charged mainly to discourage investors from leaving plans in the middle. Usually, there is a cost for exiting an equity mutual fund within one year of investing. However, it is prudent to read the offer documents carefully before investing or exiting.
As a budding investor, you must stay updated with all the basics of mutual funds.
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