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Important Terms in a Mutual Fund Rufino D'souza

As we have seen in our previous articles, mutual funds have many advantages such as diversification, economies of scale, liquidity, professional management etc. but like any other investment, there are specific terms related to mutual funds which investors may not understand or are not aware of their meaning completely. In this article we will understand Important Terms in a Mutual Fund.

Important Terms in a Mutual Fund

1.Entry & Exit load

These are basically charges applicable when an investor chooses to leave or exit a fund or in some cases enter into a fund. With the regulation of the mutual fund industry, SEBI has reduced the Entry load to Nil for almost all mutual funds and Exit loads are applicable only to a particular type of mutual fund, such as diversified equity funds, to the extent of 1% of the amount withdrawn and only if the said redemption is done within a year of entry.

2. Offer document

Every mutual fund has 3 important documents which are prepared by the respective AMCs (Asset Management Companies) to provide information about a scheme. The approval of these documents is given by Securities and Exchange Board of India (SEBI). These documents include the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM). All these documents are provided with details that an investor ought to know before investing in a mutual fund scheme. 

 3. SID

The Scheme Information Document basically contains information pertaining to the scheme. It would ideally contain past performances, benchmarks, investment objective, asset allocation, expense ratio, loads, liquidity details, risk factors etc. The SID should ideally be read alongwith the SAI for better understanding.

4. SAI

The Statement of Additional Information discloses the basic operations of the fund. It would ideally contain changes made to a particular scheme or the operation of the scheme and related areas. The major information in the document is usually not important to an investor as most of it is already covered in the SID. Thus this document, as the name suggest is only for additional information like details of the AMC, constitution of the fund and other legal information.

5. KIM

The Key Information Memorandum, is a shorter version of the SID and as the name suggest, it provides key information related to the scheme. It is almost a ready reckoner for investors to browse through the important and key details of the fund so that they can take an informed decision.

6. Units

A mutual fund is a combination of a portfolio of shares, bonds and various other types of instruments. The common denomination of all these put together is called a unit. So when people enter a mutual fund, they purchase units of that particular fund depending on the price of each unit, also known as NAV.

Therefore, INVESTED AMOUNT / NAV at time of purchase = NO OF UNITS   

E.g. – assuming an investor has Rs.25000/- to invest in a mutual fund and the prevailing NAV = Rs.25, so in this case he would get 25000 / 25 = 1000 units.

7. NAV

The Net Asset Value of a fund is basically the price of each unit of the fund or how much is needed to enter into the fund. Nav’s change on a daily basis based on market fluctuations. The type of fund which possess a higher risk would see a comparatively higher fluctuation in NAV as compared to less riskier funds like debt or liquid funds. NAV is useful to know the current value of your investments

          NAV x NO OF UNITS = CURRENT VALUE OF INVESTMENT

e.g.  Assuming no of units purchased are 1000 and NAV is Rs30.

Then the current value of your Investment = 30 x 1000 = Rs.30000.

The above are some terms to keep in mind in order to get a better understanding of mutual funds, so that you are better informed and educated before making a decision. We will cover more terms like SIP, STP, SWP, in our next article so stay tuned!!

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About the Author :

Rufino Dsouza is a Certified Financial Planner who specialises in  the following Services :

  • Client wise portfolio management.
  • Investment seminars. 
  • Investment solutions and goal planning.
  • Tax planning, and effective investment tools for the same.

His Contact details are as below :

  • Phone – 7021651902 ( whatsapp/call)
  • Email – RndInvestments9@gmail.com
  • FB page – RND investments 
  • Instagram – RND investment
Hope you enjoyed this article Important Terms in a Mutual Fund. Please read our earlier article Best Tax Saving Investments In India. Please check out our Smart Shops.

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