“That mutual fund app was filled with so much insightful data but I had no clue about the glossary it used”. This is a very common financial dilemma around investors. Financial literacy is critical, and it plays an important role in making investment-related decisions.
Knowing commonly used mutual fund terminology will assist first-time investors to understand how mutual funds function and will also aid them in investing across asset classes based on their financial goals.
You may have invested in mutual funds based on the advice of a friend or financial advisor, but learning a few jargons can help you make better selections the next time. Here’s a quick rundown of the most important words to understand before investing in Mutual Funds:
- Asset Allocation:
Asset allocation is the act of distributing your finances across multiple asset classes in order to manage the risk of your mutual fund portfolio. Asset allocation impacts an investment portfolio by optimising returns and minimizing risks. It also can minimize tax liability since different types of assets have different tax rates.
Compounding is arguably the most effective weapon an average investor can employ to plan for various financial purposes of life. To make it for more clear here’s an example:
Say you have invested Rs.100 in a fund and you are receiving the interest of Rs. 10 on it. This Rs. 10 is reinvested as a whole new capital (100+10 = 110). Hence now you are receiving interest on Rs. 110.
- Benchmark Index:
A benchmark index is a source of comparison for determining how well a fund has performed in comparison to its rivals and the markets. Essentially, it shows how much the fund gained in comparison to what it should have earned.
- Systematic Investment Plan:
SIP, or a systematic investment plan, is a method of investing in mutual funds that allows an investor to invest a predetermined amount at regular intervals.
A portfolio is a collection of securities owned by an investor. The securities might be diverse or the same. It is essential to keep a diverse portfolio for higher results.
Volatility refers to the variance or dispersion of returns for a certain security or portfolio.
The more the volatility, the bigger the danger. The stock market is said to be volatile if it moves by one percentile in each direction, that is, whether it rises or falls by one percentile. It is denoted by the symbol VIX, which stands for Volatility Index.
- Asset Management Company (AMC)
The AMC is in charge of managing mutual fund schemes. It invests customer money that has been pooled into a range of assets. Investors should choose their AMCs carefully since they will be in charge of your hard-earned money.
When you search “invest mutual fund“, you are exposed to a number of apps that help you understand the meaning of the jargon. Moreover, investors who just have started their investment journey can avail of intellectual learning on their own just from these apps.