There Are Different Types Of Mutual Funds Like Equity Mutual Funds, Debt Mutual Funds, Hybrid Mutual Funds, And Other Funds.
Mutual Funds Collects Money From Many Investors And Then They Assign An Experienced Fund Manager For Each Fund. The Fund Manager Will Manage The Funds Collected From The Investors.
For Example, If We Invest In Equity Mutual Fund. Then The Fund Manager Will Invest the Funds In Equity Segment Only. This Is How Mutual Fund Works.
Now In This Article, You Are Going To Learn About Important Terms To Know Before You Are Investing In Mutual Funds.
Net Asset Value In Mutual Funds( NAV )
For Example, If We Invest 10 Thousand In Tata Motors Shares. And Let Us Assume If The Share Price Is 200Rs, So We Will Get 50 Shares Of Tata Motors.
Similarly, If We Invest 10 Thousand In Mutual Funds. Every Fund Will Have NAV ( Net Asset Value ). Here NAV Is the Same As Share Price.
In Mutual Funds, The Funds Are Invested In Different Stocks Or Shares Not In A Particular Stock. So It Is Not Possible To Track The Average Increase Or Decrease In Price Of All The Shares. That’s Why They Give Us Units Instead Of Shares Of Every Company. Units Will Have Some Value Which Is Known As NAV. It Is Also Known As NAV Per Unit.
For A Particular Fund If The NAV Is 100Rs. Then You Will Get 100 Units For 10 Thousand Investment.
In Simple Words, NAV Is Like a Share Price And Units Are Like Share Quantity If The Stock Prices Increase In Which The Funds Are Invested. Then The Value Of NAV Also Increases.
In Growth Funds They Reinvest The Profits, So In Growth Funds Over A Long period The Power Of Compounding Works Very Well.
For Example, If The Fund Is Giving 10% Returns And You Invested 10k After One Year It Will Become 11k, And After Two Years It Will Become 12.1k. So Here The Power Of Compounding Works Very Well Over A Long Period.
In Dividend Funds, The Profits Are Paid As Dividends. So Dividend Funds Will Not Generate Wealth Over A Long Period.
The NAV Of The Dividend Funds Will Be Reduced As Per The Dividend Payout.
Dividend Reinvestment Plan
In A Dividend Plan, The Dividends Are Paid To The Unit Holders In Cash. But In Dividend Reinvestment Plan The Mutual Fund Will Not Pay Dividend To the Unit Holders Instead They Buy New Units By The Dividend Amount And Credits It To The Account.
To Maintain Mutual Funds There Will Be Some Expenses Like The Funds Are Managed By Professional Fund Manager And They Need Staff, Advertising Costs And Taxes All These Are The Expenses For Mutual Funds. So They Charge Investors For The Expenses As Expense Ratio.
EXPENSE RATIO = TOTAL EXPENSES FOR FUND / TOTAL FUNDS OR ASSETS.
Expense Ratio Is For Year.
For Example, If The Total Funds Are 1 Crore And The Expenses Are 1 Lakh Then The Expense Ratio For This Fund Is 1%. If You Invests 1 Lakh In This Fund, They Will Charge You 1000Rs For Year As Expense Ratio.
So While Choosing A Mutual Fund, If The Funds Are Giving Same Returns. Then Choose A Fund With a Low Expense Ratio.
Exit Is Nothing But While We Exiting From The Fund They Will Charge Some Percentage As Exit Load.
For Exit Load There Will Be Certain Period. The Period Maybe 1 Year Or More Than 1 Year, For Example, If The Exit Load Period For A Fund Is 1 Year Then They Will Charge Only If We Exit Within One Year, After 1 Year There Will Be No Exit Load.
Different Funds Will Have Different Exit Load Periods And The Exit Load Maybe Up To 3% For Equity Mutual Funds And Up To 2.75% For Debt Mutual Funds.
For Example, If You Invested 1 Lakh, The Exit Load Period For That Fund Is 1 Year And After 6 Months If Your Amount Becomes 2 Lakhs And You Want To Exit From The Fund. So Now They Will Charge Exit Load For 2 Lakhs.
So Choose The Funds With Low Exit Load.
Regular Mutual Funds
If Anyone Suggested you Mutual Fund And If You Investing In The Fund Or If There Is Any Middle Man Or Company Between You And Mutual Fund It Is Called As Regular Fund. The Middle Man Will Get Some Commission. The Commission Amount Will Be Charged From Your Funds.
For Example, If You Invested In Regular Plan By Using UPSTOX Then Upstox Will Get The Commission. So Don’t Choose A Regular Plan.
Direct Mutual Funds
Direct Funds Means You Are Investing Directly In The Funds And There Is No Need To Pay any Commission In Direct Funds.
Almost All Apps Are Offering Direct Plans.
Open Ended Funds
When Mutual Fund Launches A New Fund Known As NFO ( New Fund Offer ).
If It Is Open-Ended Fund Then We Can Buy Invest Anytime We Want And Can Exit At any time.
In Open-Ended Funds, We Can Do SIP.
Closed Ended Funds
When A Mutual Fund Launches a New Fund Known As NFO ( New Fund Offer ).
In This Type Of Funds, We Can Invest Only At The Time Of NFO. And In Closed Ended Funds There Will Be A Lock Period So We Need To Hold The Fund Until The Exit Period. The Exit Period Maybe 3 Years, 5 Years Or Even More.
In Closed Ended Funds SIP Is Not Possible As We Can Only Invest At The Time Of NFO.
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