Mutual funds, simplified

When talking about mutual funds, a lot of jargon is spewed.

Here's to understanding what all these terms mean.

Let's first start with the absolute basic: what a mutual fund is.

Mutual fund

Simply put, a mutual fund pools together money from a number of investors, uses professionals to manage and invest it with the aim of achieving a return.

The mutual funds industry is regulated by the Securities and Exchange Board of India.

• A different kind of mutual fund

AMC

An Asset Management Company is the fund house, or the company that manages the money.

The mutual fund itself is a trust registered under the Indian Trust Act, and is initiated by a sponsor. The sponsor is the person who acts alone or with another corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund.

For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fund.

ABN AMRO Asset Management (India) Limited is appointed as its investment manager.

So, ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund and are managed by the ABN AMRO AMC.

• Fund investors: Check your tax implication

ELSS

Equity Linked Saving Schemes are diversified equity mutual funds (funds that invest in the shares of various companies of various sectors) with a tax benefit.

To avail of the tax benefit, your money must be locked up for at least three years.

The tax benefit for these schemes falls under Section 80C.

NFO

A New Fund Offering is the term given to a new mutual fund scheme. During the launch period, fund investors can buy units for Rs 10 each.

• How to invest in a mutual fund

The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall.

This is a fee charged when you buy or sell the units of a fund.

When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load.

Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund.

Now, let's assume you are selling the units of your fund. And the Rs 10,000 you invested initially is now Rs 15,000. Let's further assume that the exit load is 2%. So you pay Rs 300 and get back Rs 14,700. 

Generally, if funds charge an entry load, they will not charge an exit load. Or vice versa. Only one of the loads is charged.

The load is a percentage of the NAV.

• Will following a fund manager make me rich?

SIP

A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units.

Portfolio

This is the term given to all the investments made by the fund as well as the amount held in cash.

Corpus

Let's assume a very small mutual fund has an initial investment of 1,000 units and each unit is worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred to as the Corpus. Later, some other investors invest Rs 2,000. Now the corpus will be Rs 12,000 (Rs 10,000 + Rs 2,000).

The total amount invested (Rs 12,000) is called the corpus or the total amount of money invested in the fund.

AUM

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

Let's say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This figure is referred to as AUM.