Mutual Fund Terms You Must Know

The fast world that we live in usually changes only when we choose to change our perception of various concepts. More often than not we have a negative or uninspiring perception on things we don’t know or don’t quite fully understand. Investing and planning for future expenses could be one such concept, we either don’t do it because of the effort necessary or unclear concepts. Those that do it and still fail are discouraged to pursue it further, probably because they didn’t do it correctly. In this article Mutual Fund Terms, You Must Know we talk about basic mutual fund terminology.

Mutual Fund Terms You Must Know

In our previous article, we learned specific terms related to mutual funds. This article we will cover some more terms which are specific to a mutual fund.

1. AMC – the AMC or asset management company, is the hands that invest the money in the company. It is their sole responsibility to use and handle the funds with them judiciously, and keep their investors happy and contended, with the various types and categories of schemes they provide. The AMC uses the funds pooled in by various investors to invest In a variety of stock and bonds. Thereby providing the diversification which an investor may not be able to do bye themselves alone. Also as the volume of the funds available with the AMC is higher the quantity of purchase (economies of scale) will also be higher as compared to an individual investor.
2. Lumpsum –

It is one of the methods of investing into a mutual fund. In this method, an investor would make a one time purchase, into the fund of their choice, with a bulk amount. These methods is preferable for the older category of people as there is a higher chance of them having access to a bulk amount of funds lying idle. These idle funds could generate a higher return in a mutual fund as compared to most other investments. The tenure, the amount , and the fund all choices are made by the investor. None of the above are fixed, having said, most funds have a minimum limit of 5000 rs as the first investment within a particular fund.

Once the purchase is confirmed by the AMC the investor is notified and a folio(portfolio) is created. The folio number will also be notified to the investor.

3. Additional purchase, switch, redemption

Additional purchases are investments made into a fund in which an investor has already made an investment. Usually, the minimum limit is 1000 rs into an already existing fund. As the folio remains the same, the investor can choose to keep additionally invest into the same fund. If the investor wants to invest into another fund, then another folio would be created. A switch basically allows an investor to switch their existing units into another fund, this option only within an AMCs funds over all asset classes (e.g equity to hybrid , hybrid to debt, only in funds of HDFC mutual fund). A redemption is basically withdrawing the current value of the existing units in the respective fund, usually occurs within 4 working days.

4. Sip

Another method of entering a mutual fund is by the famous SIP method. SIP or systematic investment plan is a more chosen option by younger age category of people, as they would be less inclined to invest a big chunk of their money altogether. In SIP an investor chooses a tenure, an amount and a frequency (usually monthly) in order to enter in a fund. By doing this he or she can literally not bother about market fluctuations, as the amount of investment is fixed for the selected frequency, so the investor would be investing at all phases (up and down) into the fund, thereby giving an average over a long term. Moreover, SIP also instils in younger and in some cases older people to ensure a habit of savings, which most of the new generation find very difficult to do. SIPs can be stopped at any time at the discretion of the investor. The disadvantage although would mean the investor looses out on the average that could make a difference later. A key point to remember in SIP, stopping and withdrawal aren’t the same. If an investor feels he will not be able to continue making further monthly payments but doesn’t need the funds he has invested into the fund by method of SIP, he can simply choose to stop the ongoing SIP, and leaves the units purchased until then in the fund itself till the time he needs said funds. On the other hand, if he needs the funds immediately, but feels he can maintain the monthly payments, he needn’t stop the sip, but simply redeem the mount he needs, thereby continuing the ongoing SIP as usual.

If an SIP is stopped, it can be renewed anytime later in the future with the same or different amount, on the condition it is done in the same folio.  

5. Swp

SWP or systematic withdrawal plan is the exact opposite of SIP. Where a person chooses to withdraw a specific amount of money or units , with a given frequency ( monthly for retirees) at the prevailing NAV, at the time of withdrawal. This is most suited for those that have generated a nice corpus in a fund and now require a source on income perhaps post retirement.

6. Stp

STP or Systematic transfer plan is the SIP version of a switch option , where a person decides to transfer a particular amount or units to another fund at a pre decides frequency, and at the given NAV applicable at the time of the switch. It is helpful for those considering retirement, to transfer a part of their corpus into a less risky asset class , but in instalments , rather than all at once.

So hopefully this article clears that doubt in the mind which makes us perceive that investments in general are tedious due to tricky terminology. Feel free to contact us for more information or similar terms

Hope you enjoyed this article Mutual Fund Terms You Must Know.

About the Author :

Rufino Dsouza is a Certified Financial Planner who specialises in  the following Services :

• Client wise portfolio management.
• Investment seminars. 
• Investment solutions and goal planning.
• Tax planning, and effective investment tools for the same.

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