Mutual fund lexicon
Read the following terms to know why mutual funds are flexible and convenient investment instrument
Rupee Cost Averaging: It is a natural outcome of investing through SIPs. Considering a long term investment approach, rupee cost averaging can even out any market ups and downs in the long term, allowing the investor to gain maximum benefits on his or her investments over time.
Power of Compounding: One of the basic rules of being a successful investor is to start early. Since all investments and returns are based on the power of compounding, an investor starting out early can earn much higher returns than the one starting out late even with a slightly higher corpus.
Systematic Investment Plan (SIP): The concept of SIP is similar to recurring bank deposits wherein investors contribute a fixed sum of money at regular intervals. Systematic Transfer Plan (STP): STP allows investors to transfer the pre-defined amount on a specified date from one particular scheme to another by giving one-time instruction to the fund house.
Systematic Withdrawal Plan (SWP): SWP helps investors to redeem a fixed amount of their investments from their mutual funds on a pre-determined frequency.
Compounded Annualised Growth Rate (CAGR): CAGR is very useful to compare the performance of two mutual fund schemes as investments usually do not grow at a constant rate; the CAGR smoothens out returns by assuming constant growth. For example, if an investment of Rs 5,000 grows to Rs 6,500 over a five-year period, it gives an absolute return of 30%, which seems high. However, the CAGR for the same works out to 5.38%, which pales in comparison.
Redemption: A transaction where an investor is paid an NAV-linked price on his withdrawal of investment from a fund.
Yield: The income (dividend/interest) received from an investment, generally over the past 12 months, expressed as a percentage of its current price.
Exit Load: When you redeem a mutual fund scheme, the company charges a fee for exiting the scheme before a certain period, known as exit load.
Net Asset Value: NAV is the value of each unit of a particular mutual fund scheme on any given business day. It is calculated by dividing the value of net assets by the outstanding number of units. NAV helps in determining the price at which an investor can purchase or sell mutual fund units.
Read: Mutually Beneficial