A big problem that investors like you and I face, is that many keywords of mutual funds-financial jargons which we hear while investing whose meaning we do not understand at all. For example, when we go to invest in a mutual fund, on every website, we can see that, terms like EUM, Expense ratio Fund manager and apart from this, NAV. We really do not understand what it means. Actually these are key words of mutual funds. These keywords are also known as financial jargons in term of mutual funds. Now, let us step by step discuss what each financial jargon or key words of mutual funds means and how that impacts our investments.
AUM- Asset Under Management (keywords of mutual funds)
Let us talk about the first financial jargon. And the first financial jargon is AUM- “Asset Under Management”. Like I just told you How do mutual fund works. Firstly, many investors, pool their money with an asset management company.
- Now consider that a fund was going to start for which 100 investors pooled 100 Rupees each.
- So, what is the total amount? The total amount is 10,000 Rupees. So, this 10,000 rupees is AUM, “Asset Under Management”.
- The money after being pooled, that an asset management company Manages in that fund, is known as Asset under management.
- Why is AUM important in any investment we make in a mutual fund? Because whichever mutual fund’s AUM is more, the liquidity there is good.
- If the liquidity is good, whenever you invest money, and want to remove that money, will never have a problem.
NAV- Net Asset Value (keywords of mutual funds)
The second financial jargon is NAV- “Net Asset Value”. I will explain this to you in very simple terms.
- Whenever you go to buy a share, you buy it at a price. For example, you purchased a share whose price was ₹50.
- In the same way, when you buy a mutual fund, then, the price of mutual fund is called NAV.
- Now, consider that the total asset under management was ₹10,000. After a year, it increases to become ₹20,000 because the fund manager invested the money in a good place.
- So, one person, who took ten units, when he bought it, the value was ₹10. Now, its value will increase to become ₹20.
- So, as the NAV continues to increase, your return from one mutual fund starts to become better.
The third and very important financial jargon in mutual fund is known as Expense ratio. Now, what is expense ratio? I will tell you that in detail.
- As I told you that we, retail investors pool our money in an asset management company.
- And that money is further invested by a fund manager. For a fund manager to invest the money he has to do a lot of research.
- And the asset management companies have to undergo a lot of expenses to manage the different funds because they have to do research.
- That, at that time, where should they invest so, where do all those people get all that money from?
- So, in every investment, when you invest in a mutual fund then you have to give an amount of expense ratio.
- Now, let’s say that you have chosen to invest in ABC mutual fund and when you went to the Grow website, you saw that the expense ratio to invest in the mutual fund is 2.3%.
- Take for example that you invest ₹100 then in one year you have you give an expense of ₹2.3 to the asset management company.
- So, whenever you choose a mutual fund, then pay attention that in that category.
- What the expense ratio for the other mutual funds are and if you invest in a mutual fund whose expense ratio is too much, then you will get less returns so, lesser the expense ratio, better the return.
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The next financial jargon is Exit load. Whenever you make an investment, make it for the long run because you always get a good return in the long run. And mutual fund also focuses on this topic.
- Whenever you invest in any mutual fund then the mutual fund tells us that you have to make the investment for a certain amount of time at minimum.
- But, if you get an emergency from somewhere and you have to remove money from there, then, for that you have to give a certain amount of expense for that.
- Take for example, that you invest in ABC mutual fund. Its exit load was 1% and they say that their exit load will take up to 1 year.
- If you make an investment today, and between now and a year later, you remove your money, then, on every ₹100 you have to give ₹1 to the asset management company.
- But, for example if you made an investment today and you remove the money after three years then you don’t have to give the exit load. Every mutual fund has a different exit load.
Regular and direct mutual funds
The next financial jargon is regular and direct mutual funds. You must’ve heard this name very commonly. You probably don’t understand this sometimes and under-estimate it, thinking that it doesn’t make much of a difference. First let us understand what the difference between regular and direct is?
- Regular investment is when you invest in a mutual fund through a broker or an agent.
- In this, your expense ratio is slightly more as compared to direct mutual funds.
- What happens in direct mutual fund is that, whenever you make an investment then your investment takes place directly with the AMC.