New Delhi: Whether you are a new or existing investor in mutual funds in the market, there are some basic terms that are frequently used in this industry that you need to know. If you know
AMC (Asset Management Company)- The wealth management company is the company that manages the funds of individuals. A mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a company to establish a mutual fund.
Net Asset Value (NAV)- Net asset value (NAV) represents the net worth of an entity and is calculated as the total value of the entity’s assets less the total value of its liabilities. More used in the context of a mutual fund or an exchange-traded fund (ETF), net asset value represents the price per share/unit of the fund on a specific date or time.
Distribution of dividends – When you buy a stock in a company and the company issues a dividend, as an investor you are entitled to receive those dividends. Similarly, when the fund manager buys the shares of a company and the company issues a dividend, the AMC receives that dividend. Since the funds with the AMC belong to the investors, this dividend belongs to the investors.
The dividend you are entitled to receive from the AMC is to the extent that you have invested in the fund. The AMC gives you two options – you can withdraw this dividend or you can choose to reinvest the dividend amount and buy more units of the fund. The dividend payout option helps you withdraw the dividend as the dividend is paid. This option is now called the “Payment of income distributions with capital withdrawal” option.
Dividend Reinvestment Plan – This plan receives the dividend on your behalf and reinvests it in the same fund. So necessarily, you don’t receive the dividend in the form of cash, but rather more units or net asset value of the same fund. This option is now called the “Reinvestment of income distributions with capital withdrawal” option.
Growth plan – In the growth plan, the investor does not receive any dividend. The profits made are reinvested in the fund and therefore the “cumulative effect” works well here. Personally, I prefer this plan to the other two.
Open – When an AMC launches a fund, it has the option of letting that fund operate for a set period of time or maintaining it indefinitely. Funds with a defined duration are called “closed funds”. If a fund does not have an expiry date, then it is an open-end fund.
Equity – This is a reference to the asset class in which the mutual fund invests. As you know, stocks refer to stocks listed on the market. Another asset class is debt, which can be either corporate debt or PSU debt. More on that when we dive deep into debt funds.
Charged- There are two types of loads, input load and output load. To cover the administrative and operating costs of a fund when charges are levied at the time of investment they are called entry charges and if charges are levied at the time of redemption they are called exit charges. Not all funds charge fees. It depends from fund to fund.
Date of grant – This is the date from which the fund began operations. The attribution date gives you an idea of the age of the fund. It’s not that it matters, but the older the fund, the easier it is to analyze against a new fund.
Regular plan – Regular plans are mutual fund plans purchased through an intermediary. These intermediaries can be brokers, advisers or distributors. The intermediaries charge the fund house a certain commission for the sale of their
Direct mode – Direct plans are for those who prefer to invest DIRECTLY in a mutual fund without the help of a distributor/agent. Investing in a direct plan is like buying a product directly from the manufacturer, reducing the cost to the customer.