Mutual Fund Basics

What is Mutual Fund?

A mutual fund is an instrument that collects money from different investors and invests it in various financial securities such as stocks and bonds to earn highest possible return.

Below are important terminologies used in Mutual funds:

  1. Fund House/Asset Management Companies (AMC):

Company that has created mutual fund schemes and manages funds of the investors. For example: ICICI Prudential is the AMC of ICICI Prudential Blue-chip fund.

  • Fund Manager

The Fund Manager is the one who decides where to invest your money. Track record of fund manager is important while selecting any fund.

  • AUM

Assets Under Management is the total value of all the investments currently being managed by the fund.

  • NAV (Net Asset Value)

Net asset value (NAV) represents a fund’s per share market value. It is calculated by dividing the total value of all the securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding. An NAV is calculated once at the end of each trading day based on the closing market prices of the portfolio’s securities.

  • Units

It is the part of portfolio which the investor owns. For example if NAV of fund ABC is Rs 500 and investor is investing Rs 5000 then investor will get total 10 units of the fund.

  • Load Factor

Mutual fund companies charge an amount to investors when they leave a scheme. This charge is referred to as a ‘Exit load’. Exit load is charged to discourage investor from exiting mutual funds. Different mutual funds houses charge different fees as an exit load. Exit load is a time bound parameter i.e. for some funds exit load will be charged only when fund is exited within one year. Investor should check this factor before investing in MF scheme.

  • Expense Ratio

Expense ratio is the cost of running and managing a mutual fund. It is expressed as % of Asset Under Management (AUM). If the funds’ assets are small, the expense ratio can be high. This is because the fund has to manage its expenses from a limited asset base. Similarly, if the net assets of the fund are growing, the expense percentage should ideally come down. 

Example: Total Assets of Mutual Funds ABC = Rs 10 Crore
Administrative expenses = 10 lacs
Other Expenses = 5 lacs
Expense ratio = Total Expenses/Total Assets 
= 15 lakh/10 crore 
= 1.5% of your Investment Value

Leave a Comment