Essential terms to know

Here are 10 essential terms that you should know before investing in mutual funds:

Net Asset Value

Net asset value or NAV is the most commonly associated word with mutual funds and widely used by investors. NAV of a mutual fund is the market value of the assets of the scheme minus its liabilities. It is calculated by dividing the value of net assets by the outstanding number of units. It is the value of each unit of a particular mutual fund scheme on any given business day.

Benchmark

A benchmark is a point of reference that indicates how a mutual fund has performed compared to its peers and markets. Each fund has a different benchmark, which depends on the investment objective of the fund. For instance, the BSE Sensex and the Nifty are widely used benchmarks for equity funds.

CAGR

Compound Annual Growth Rate (CAGR) is the return of a fund from one point to the other after factoring in the time for holding investments. While investments usually do not grow at a constant rate, the compound annual return smoothens out returns by assuming constant growth

Dividend

The dividend option does not reinvest the profits made by the fund. Instead, it is given to the investor from time to time

Expense ratio

Calculation of the percentage of the fund’s assets which have been paid as expenses over the year.

Unit

A unit represents one undivided share in the assets of the mutual fund scheme that you invest in.

SIP

SIP is a process that allows you to invest a regular sum at a pre-decided frequency in a mutual fund scheme.

STP

Systematic Transfer Plan (STP) is a process by which you can mandate the mutual funds to transfer a certain amount from one scheme to another at a pre-decided frequency

SWP

Systematic Withdrawal Plan (SWP) is a process by which you can mandate a specific sum or units to be withdrawn from a MF scheme at a pre-decided frequency

Redemption

A transaction where an investor is paid an NAV-linked price by the fund house upon withdrawal of investment.