investing

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Financial knowledge series

Mutual funds siMPlified

Part 3 of 26

essential mf terms
M
utual funds (MFs) are possibly one of the simplest market-linked investment products when it comes to meeting financial goals, whether its your short-term needs or the long-term financial plans. However, to make the best of what they have to offer, you should understand some basic terms related to MFs. We take a look at five such important terms: unit Holding a unit in a mutual fund scheme is akin to owning one share of a company. A holder of such units in any of the MF schemes is called a unit-holder. When you invest a certain amount in an MF scheme, you are allotted a certain number of units, the value of which determines the worth of your investment. net asset value (nav) Just as a share or bond is bought and sold at a specific price, each mutual fund unit is bought and sold at its NAV. A schemes NAV is its net assets (market value of the securities it owns minus whatever it owes) divided by the number of units it has issued. If, for example, you were to invest Rs 10,000 in a scheme when its NAV is Rs 10, you will be allotted 1,000 units (10,000/10). However, NAV of a mutual fund is a dynamic concept. The market value of a schemes portfolio changes day to day, just as prices of shares and bonds move up or down. The number of units outstanding also changes as new investors come into the scheme and existing ones leave. If the NAV of your scheme rises from Rs 10 to Rs 11 over a period of time, your scheme is said to have generated a return of 10 per cent. The same principle applies to falling NAV. So, if your schemes NAV falls from Rs 10 to Rs 9, it is said to have lost 10 per cent. The NAV of any scheme tells us how much each unit is worth at any point in time and is, therefore, the simplest measure of how a scheme is performing.

UNDERSTANDING SOME BASIC TERMS COULD HELP YOU TAKE INFORMED DECISIONS WHILE INVESTING IN MUTUAL FUNDS. HERE'S A READY-RECKONER
lOad Load refers to the charge or the cost which your investment in a mutual fund scheme is subjected to. At present, there is no entry cost for mutual funds, with the entire investment including SIP transactionsdeployed by the asset management company (AMC) on your behalf. This applies to both investments made directly by you or through a distributor. However, an exit load does apply and it varies with different types of funds. Usually, equity funds come with 1 per cent load for exiting before one year of holding the investment. After a year, it is nil. ReCuRRing eXPenses There is a recurring expense that keeps getting adjusted from your fund value on a regular basis. This is what your fund charges you for managing your money. Fund managers have to be paid a fee, as do the other constituents involved in managing your money. All this entails costs, which your scheme recovers from you, within limits. Every year, a fund charges some amount to your schemes NAV, reducing your returns by that much. While rules allow equity schemes to charge a maximum of 2.50 per cent of the corpus as expenses every year, for debt schemes, the maximum limit is 2.25 per cent.

nav is a dYnaMiC RatiO. the MaRket value Of a sCheMes PORtfOliO Changes daYtO-daY, just as PRiCes Of shaRes MOve uP OR dOwn

RedeMPtiOn You can sell your units, partly or fully, back to your fund whenever you want. While its a sale from your point of view, in mutual fund parlance, it is called repurchase or redemption. Your mutual fund will pay you the schemes NAV prevailing on that date minus the exit load, if applicable, and directly credit your nominated bank account in three days or send you the money through a cheque.; editor@outlookmoney.com neXt issue: hOw Mutual funds wORk
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O U T L O O K M O n e Y [ 47 ]