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The 5 mutual fund terms you should be familiar with

Updated on March 19, 2016

Five Mutual Funds Terms

As a new investor, you may have been advised quite a few times about investing in a mutual fund. And rightly so – mutual funds schemes in India are a sure way to grow wealth from a diverse portfolio of investments. Despite the fact that you are a relative novice at investing, mutual funds in India offer you the same advantages and opportunities to progress towards your financial goals.

But as you research the mutual fund landscape in India to find the best schemes and how they will benefit you, you repeatedly encounter jargon that you cannot fully comprehend. For example, what is a ‘Benchmark Index’? Also, how is an STP different from an SIP? You will come across many such terms that only serve to confuse you. It is prudent to brush up your knowledge about the different terminologies used in connection with mutual funds, what they mean and how they affect your investment.

Consider these five terms:

NAV: An abbreviation for Net Asset Value, NAV is the actual price of one unit of your mutual fund. You or your mutual fund manager purchase or sell units of the fund at this price, i.e. the NAV, and the performance of your fund can be mapped basis the increase or decrease in the NAV. The simplest way to see if the fund is in profit is to compare the NAV with the price at which you purchased the fund. If NAV > Fund purchase price, then the fund is showing a profit.

Asset Allocation: This is a process by which the fund portfolio is ‘allocated’ across various asset classes, primarily fixed income instruments, fixed deposits, equities, money market instruments, bonds, etc. It is done in line with your objectives as an investor, aligning with your end financial goals and by charting out the best portfolio to achieve those objectives. The fund’s future growth is thus indicated by the asset allocation.

Growth Option: Normally, your mutual fund investment gives you returns in the form of dividends, or with extra units. However, with the growth option the investor can grow wealth through compounding returns – the returns stay with the fund with this option. It is useful for investors who wish to grow their wealth through capital appreciation.

STP: If you are familiar with the working of an SIP, you know that your periodic investment is debited from your bank account. In a Systematic Transfer Plan (STP), the bank account is replaced by a debt fund. Thus, you can transfer a set sum of money from one fund to another (where both funds come from the same company). The advantage of the STP is that the fund company can transfer your money from debt to equities and lower the risk at the same time.

Dividend Reinvestment: Your mutual fund provides you with dividends as returns. Under the option of Dividend Reinvestment, the dividends are used to purchase new units, thus continuing the fund. Instead of payment credited in your bank account, the investor receives fresh units for the fund.

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