Mutual funds have become a popular investment choice because they have a potential to create major returns over time. However, to invest in mutual fund, there are some key words to know before you start your investment. Here are 10 must-know terms that help you make the right choices in mutual fund investments.
1.Net Asset Value or NAV:
NAV refers to the price of a mutual fund per unit. It’s calculated by taking the total assets of a fund, deducting the liabilities, and then dividing that number by the outstanding units. Simply, the NAV indicates how much it will cost you to purchase or sell units in a mutual fund.
2.Expense Ratio:
This is the annual fee that is charged by the mutual fund for its investors. It includes maintenance charges, administrative and other expenses. The lower the expense ratio, the better since more of your money is invested.
3.Systematic Investment Plan or SIP:
SIP allows investing in mutual funds by a systematic and fixed amount at regular intervals. It is a great way of investing small amounts over the time, thus reducing the risk of volatility in the market and creating disciplined saving habits.
4.Equity Funds:
Equity funds mainly invest in stocks or shares of companies. These funds offer a high return potential but come with a higher risk level. They are best suited for long-term investors with a higher risk appetite.
5.Debt Funds:
Debt funds are more about fixed-income securities like bonds and commercial paper. They are less risky compared to equity funds and if you are looking for steady returns these might be a good choice for you.
6.Hybrid Funds:
Hybrid funds are a combination of investments in both equities and debt instruments, and they offer a balance of risk and return. These funds are great if you’re looking for a diversified portfolio in a single investment.
7.Open-Ended Funds:
Open-ended funds let you to invest or redeem units at any time, based on the NAV. These funds give high liquidity and suitable for investors who prefer flexibility.
8.Lock-in Period:
Some mutual funds, like ELSS (Equity Linked Savings Scheme), have a lock-in period. You cannot redeem your investments during this time. ELSS funds, for example, have a three-year lock-in period and also provide tax benefits.
9.Risk Appetite:
This term refers to an investor’s readiness to take risks while investing. Mutual funds are classified into risk levels, namely, low, medium, and high. Knowing your risk appetite is important for selecting the right mutual fund for your goals.
10.Mutual Fund Apps:
There are many leading mutual fund providers in India like HDFC Sky and Axis mutual fund, which offer good variety of investment options, like equity, debt, and hybrid funds. Using a mutual fund app makes it easy to explore options, track performance, and manage your investments well.
Conclusion:
Knowing these terms will help you make informed decisions and assess fund performance before you invest in mutual funds. With the help of a mutual fund app, understanding these concepts will keep you on the right track.
Investing in mutual funds is not just putting the money to work, it is doing so wisely. So, take the time to understand these terms and then start your investment journey with confidence. With this knowledge, you are better prepared for mutual fund investments and constructing a robust financial future.