Key mutual fund terms every investor should understand

Mutual funds are investment vehicles that allow individuals to pool their money for expert-managed equity or debt investments. They are particularly popular among salaried employees who can invest regularly through a Systematic Investment Plan (SIP). This helps investors avoid the stress of timing the market. To make informed decisions, investors should understand key terms related to mutual funds. One important term is Net Asset Value (NAV). This is the price of one unit of a mutual fund and is calculated by taking the total assets, subtracting total liabilities, and dividing by the number of units. NAV changes daily based on the fund's asset value. Another key term is Assets Under Management (AUM), which represents the total assets managed by the fund at a specific time. Evaluating a mutual fund's performance against a benchmark is also crucial. A benchmark is a standard that reflects the fund's investment goals and helps investors assess its performance. There are also fees to consider. An entry load is a fee charged when investing in a mutual fund, but this has been abolished in India. An exit load is a fee for withdrawing investments before a set period. The expense ratio represents the annual fees the fund charges, indicated as a percentage of AUM. Additionally, investors should know about the growth and dividend options. Growth funds reinvest profits, increasing NAV, while dividend funds share profits at intervals. Finally, there are two types of mutual funds: direct and regular. Direct funds are bought from the Asset Management Company, usually with a lower expense ratio and higher returns. Regular funds are purchased through brokers and often have higher fees.