Chapter 7 – Mutual Funds Terminologies
NAV is an abbreviation of Net asset value. NAV is the sum total of the market value of assets held in portfolio (all the shares/Mutual funds/bonds/debentures/cash and etc.,) less liabilities if any divided by total number of mutual fund units.
For example: If a mutual fund has 1000 reliance shares with market value ₹1300 and 1000 HDFC shares with market value ₹1650 and some cash of ₹10,00,000. Let’s assume there is no liability and there are totally 1, 00,000 units in the mutual fund.
NAV = (Assets – liability)/ No. of units
= (((1000*1300) + (1000*1650) +1000000) – 0)/100000
AUM is an abbreviation of Asset under management. This value refers to total market value of assets managed by a mutual fund.
For example: If a mutual fund has 1000 reliance shares with market value ₹1300 and 1000 HDFC shares with market value ₹1650 and some cash of ₹10,00,000.
AUM = (1000*1300) + (1000*1650) +1000000
= ₹39, 50,000
- Exit load
Exit load is a small fee usually denoted by percentage of the total value redeemed that is collected by mutual fund house when the investor redeems/ switches his funds. This is often collected to discourage investors to redeem in short span. In general liquid funds do not have an exit load and equity mutual funds greater than 1 year doesn’t have exit load. The exit load and waiver period for other schemes vary as per fund houses.
- Entry load
Entry load is a small fee that is collected by mutual fund house from the investor when the investor joins a mutual fund scheme. From August 2009 SEBI has cancelled the practice of collecting entry load.
Commission is fee paid to your mutual fund agent for the investments you made through him/her. This amount will be subtracted from your investment amount and then the units will be allocated for remaining amount. If you choose direct funds there won’t be any commissions to the mutual fund agent.
AMC means Asset Management Company. These are companies that get license from SEBI to manage assets of a mutual fund. They usually take the investment decisions. SBI, HDFC, ICICI Prudential, DSP Blackrock, Reliance Nippon, Birla sun life and etc., are few leading asset management companies in India.
NFO means new fund offer, this usually happens when a mutual fund company launches a new open/closed ended mutual fund.
- Turnover Ratio
Turnover ratio is an indicator that measures how much a fund is trading.
Formula = lesser of purchase or sales/ Average monthly net asset value.
Higher turnover ratio tends to increase the expenses of AMC.
- Expense Ratio
Expense ratio is a measure of what it costs to operate a fund, expressed as a percentage of its assets. Management fee/advisory fee is the major chunk of expense ratio. It also includes marketing and distribution expenses. However it doesn’t include brokerage paid by the AMC for purchase and sale of securities as the buying and sale price are taken into account after considering the brokerage.
Compound annual growth rate (CAGR) is a metric that provides more clarity on returns that are more than one year. The main reason to use this metric is to compare returns from different asset classes such as equity, FD, bonds etc.,
CAGR = (Current value/original investment value) (1/No. of years) – 1
If I had invested ₹10,000 rupees before 10 years in a mutual fund and now the value is grown to ₹75000, The CAGR will be 22.32%
Internal rate of return is used to calculate returns when investments are done at constant interval of time such as monthly or 3 months or 6 months or yearly etc.
Extended internal rate of return is used to calculate returns when there are multiple purchases/sales transactions without any constant interval.
- Absolute Return
Absolute return is a return that asset (such as mutual fund) delivers over a period of time. Absolute returns doesn’t take period of investment for calculation.
Absolute returns = (Selling Price – Cost Price)/ (Cost Price)*100
For example If I had invested ₹10,000 rupees before 10 years in a mutual fund and now the value is grown to ₹75000 the absolute return will be 650%.
- Trailing Returns
Trailing means behind and trailing returns means looking behind returns from any particular day. This helps to determine how a fund has performed in long run; however it doesn’t show if the fund has performed consistently.
- Rolling returns
Rolling returns are calculated by taking average annualized returns for several blocks of periods at different intervals. Rolling returns can show if a fund is a consistent performer or volatile in short period.
A benchmark is a standard against which performance of a mutual fund is measured. In 2012 SEBI made it mandatory to AMC to declare a benchmark index for its mutual funds based on individual funds objective. NIFTY 50, CNX Midcap are few benchmark indices against which mutual funds are compared.
Back to Chapter 6 – Advantages of Mutual Funds
Continue to Chapter 8 – Mutual Funds Taxation
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