Mutual fund terms you should knowMutual Funds have been the most popular investment in 2017. With the Indian equity indices returning a good 28% last year, it was a great time for equity investors. What if we tell you that top 10 mutual funds in India gave average returns of 60% in 2017? They did. Funds such as the SBI Small and Midcap Fund and Tata India Consumer Fund gave returns of over 71%. Interested in mutual funds already?

If you are new to the world of mutual funds, there are many terms associated with funds. Here are some of the common ones that you need to know.

Net Asset Value (NAV)

The NAV of a mutual fund is the total value of assets for every unit of the fund that you hold. How is this calculated? The NAV is all the assets the fund is managing minus all related and permissible expenses. This is the price for your mutual fund. Does a low NAV indicate a good buy? This is a myth. The NAV of the fund shouldn’t influence your investment decision. You should look at the scheme, its performance, the portfolio it holds and fund manager expertise before you invest in a mutual fund.The HSBC Midcap Equity Fund has a NAV of Rs 64 and returned 56% last year.

Expense ratio

Expense ratio indicates the expenses incurred for running the mutual fund. It is usually expressed as a percentage of the total assets under management. These expenses will include the advisory fees and the management charges for the fund. A very high expense ratio could mean lower returns, especially if you are investing in a debt fund. The expense ratio of over 2% is considered to be high.

Systematic Investment Plan (SIP)

SIP refers to investing a fixed amount of money in a mutual fund scheme on a regular basis. A SIP can be monthly, quarterly or daily. Investing in a monthly SIP is better if you are salaried because it matches the frequency of your income. SIPs should not be stopped during market downturns because this beats their whole purpose which is getting more units when the markets drop. As you keep buying more units during market falls, you will get great returns in the long run.

Exit load

Similar to entry load, exit load is recovered from you when you sell a mutual fund or redeem mutual fund units. Most equity funds don’t have an exit load after a year, while ultra short-term funds have nil exit load.

Growth option

Looking for capital appreciation rather than regular income? Then, you can choose the growth option for mutual funds. Choosing this option will mean that you don’t get any dividends. You will get capital appreciation if the fund does well and the NAV of your fund goes up.

Market capitalisation

Market capitalisation or market cap is a company’s total value which is calculated based on the company’s present share price and the total number of outstanding shares. The formula is the present market price of the company’s share multiplied by the total number of outstanding shares. Based on the market cap, stocks are classified as large cap, mid cap and small cap. Funds that invest in these stocks are also classified in the same way.

Large-cap funds

Equity funds that invest in large-cap stocks. These are usually the top 100 companies that are the highest in terms of market cap. Large-cap funds are known to be less volatile compared to mid-cap and small-cap funds.

These are some of the most popular terms associated with mutual funds. Want to know more? Write to us with your queries and we will answer them.

Staff Writer

This article is written by RupeeIQ editorial staff.