If you are interested in investing in mutual funds, here are some terms you need to understand.

As you probably know, a mutual fund is an investment that pools together money from a number of investors. It then uses professionals to manage and invest this money?with the aim of achieving a return.


The mutual funds industry is regulated by the Securities and Exchange Board of India.


If you are interested in investing in mutual funds, here are?some terms you need to understand.


AMC
An Asset Management Company is the fund house or the company that manages the money.


The mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a corporate to?establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund.


For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fundABN AMRO Asset Management (India) Limited is appointed as its investment manager.
Various funds with different objectives can be floated under the umbrella of one parent.
So ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund. They are managed by the ABN AMRO AMC.


NAV
The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall.


Portfolio
This is the term given to all the investments made by the fund as well as the amount held in cash.


Corpus
Let's assume a very small mutual fund has an initial investment of 1,000 units and each unit is worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred to as the corpus. Later, some other investors invest Rs 2,000. Now the corpus will be Rs 12,000 (Rs 10,000 + Rs 2,000).
The total amount invested (Rs 12,000) is called the corpus or the total amount of?money invested in the fund.


AUM
Assets Under Management is the total value of all the investments currently being managed by the fund.
Let's say?the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This figure is referred to as AUM.


Diversified equity mutual fund
This is a mutual fund that invests in stocks of various companies in various sectors.


ELSS
Equity Linked Saving Schemes are diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act.
To avail of the tax benefit, your money must be locked up for at least three years.


Balanced fundA fund that invests in both equity (shares) and debt (fixed return investments) is known as a balanced fund.


Debt fund
These are funds that invest in fixed return investments like bonds. A liquid fund is one that invests in money market instruments these are fixed return investments of a very short tenure.

NFO
A New Fund Offering is the term given to a new mutual fund scheme.

SIP
A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units.
Let's say that every month you commit to investing, say,Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000.
If the NAV on the day you invest in the first month is Rs 20, you will get 50 units.
The next month, the NAV is Rs 25. You will get 40 units.
The following month, the NAV is Rs 18. You will get 55.56 units.
So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

Five fund myths

Five fund myths

Source: yahoo, Personal finance

It is easy, even for an intelligent investor, to be taken in by the hype surrounding a mutual fund scheme. Such misconceptions can impact the investments, which is why they need to be debunked.

Topics
A fund with a net asset value (NAV) of Rs 10 is cheaper than the one whose NAV is Rs 50
A balanced fund will always have a 50:50 debt to equity ratio
Large corpus funds generate higher returns
Funds that regularly declare dividends are good buys
SIP always scores over lump-sum investing


Here are the five common myths:

1. A fund with a net asset value (NAV) of Rs 10 is cheaper than the one whose NAV is Rs 50:
The NAV of a mutual fund represents the market value of all its investments. Any capital appreciation in the fund scheme will depend on the price movement of its underlying securities. Suppose you invest Rs 1,000 each in Fund A (a new scheme with an NAV of Rs 10) and Fund B (an older scheme with an NAV of Rs 50). You will get 100 units of Fund A and 20 units of Fund B. Let's assume that both the schemes invest in just one stock, quoting at Rs 100. If the stock appreciates by 10%, the NAVs of the two will rise by 10%, to Rs 11 and Rs 55, respectively. In both cases, the value of investment rises to Rs 1,100-an identical gain of 10%. Fund B's NAV is higher as it has been around for a longer time and had bought the scrip earlier, which appreciated. Any subsequent rise and fall in the funds' NAVs will depend on how the scrip moves.

2. A balanced fund will always have a 50:50 debt to equity ratio:
Balanced funds aim to achieve a balance between equities and debt. But the balance can tip depending on the nature of the fund. The equity-oriented balanced funds usually invest at least 65% in equities and the rest in debt. The others do this in a 40:60 ratio.

3. Large corpus funds generate higher returns:
A fund with a very large corpus is prone to inefficiencies as rising assets become unmanageable after a point. Also, most fund managers are more dextrous managing mid-sized funds. A large fund forces them to broaden their stock universe. This can lead them to include less researched or low-potential stocks in the fund's portfolio or increase the stake in certain stocks, leading to a selection bias. HDFC Equity has a corpus of Rs 2,680 crore, but its three-year annualised return is -1.68%, whereas the best performer for the same period is Reliance Regular Savings Fund, with an annualised return of 7.71% and an AUM of Rs 618 crore. At one-fifth the assets, the Reliance fund has fared far better.

4. Funds that regularly declare dividends are good buys:
Fund houses declare dividends when they have distributable surplus. However, there are times when fund managers declare dividends as they do not have adequate investment opportunities. In some circumstances, a fund manager may sell some quality stocks to generate surplus for dividend distribution to attract investors.

5. SIP always scores over lump-sum investing:
A systematic investment plan (SIP) is the best way to invest during volatility as it lowers the average per unit cost. This is also termed as rupee cost averaging. However, investing systematically during a bull run results in lower returns. When markets are constantly rising, SIP fails to lower the average cost and so results in lower returns compared with a lumpsum investment.