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Mutual Fund & Investment Essentials
Plain-language definitions from the time.money glossary.
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Mutual Fund & Investment Essentials
18 terms- Actively Managed Fund
- A mutual fund where a fund manager actively selects and adjusts holdings with the goal of outperforming a benchmark index, in exchange for a higher expense ratio than a passive index fund.
- Asset Allocation
- The mix of asset classes (equity, debt, gold, real estate, cash) an investor holds, generally the single biggest driver of a portfolio's long-term risk and return, more so than the choice of individual funds or stocks within each class.
- Assets Under Management (AUM)
- The total market value of the investments a fund house, advisor, or platform manages on behalf of clients. At the fund level, AUM is often loosely used as a proxy for investor confidence; at the advisory level, it's also the base many advisors use to calculate their fee.
- Benchmark
- A reference index (such as Nifty 50 or Nifty 500) against which a fund's performance is measured, letting an investor judge whether a fund manager is actually adding value or simply riding the broader market.
- CAGR (Compound Annual Growth Rate)
- The annualised rate at which an investment would have grown if it had compounded steadily over a period, smoothing out year-to-year volatility into a single comparable number. CAGR works well for lump-sum investments but is not appropriate for SIPs, where XIRR is the correct measure.
- Direct Plan vs Regular Plan
- Two versions of the same mutual fund scheme: a Direct Plan is bought straight from the fund house with no distributor commission, resulting in a lower expense ratio, while a Regular Plan is bought through an intermediary who earns a trail commission, built into a higher expense ratio.
- Diversification
- Spreading investments across asset classes, sectors, and fund categories so that no single loss can meaningfully damage overall wealth. Diversification reduces risk but, unlike asset allocation, doesn't eliminate the need to still pick each category deliberately.
- Equity Linked Savings Scheme (ELSS)
- A tax-saving mutual fund category investing primarily in equities, offering a deduction of up to ₹1.5 lakh under Section 80C, with a mandatory 3-year lock-in, the shortest lock-in among all Section 80C tax-saving instruments.
- Exit Load
- A fee charged by a mutual fund if units are redeemed before a specified holding period, designed to discourage short-term trading. It's typically a small percentage of the redemption value and doesn't apply once the minimum holding period has passed.
- Expense Ratio
- The annual fee a mutual fund charges, expressed as a percentage of the amount invested, covering fund management and administration costs. A 1% difference in expense ratio compounds meaningfully over a long horizon, one of the reasons Direct Plans are often preferred over Regular Plans.
- Fund of Funds (FoF)
- A mutual fund that invests in other mutual funds or ETFs rather than directly in stocks or bonds, often used to access asset classes like gold or international equity through a single India-domiciled scheme.
- Index Fund
- A mutual fund that passively replicates a market index (such as the Nifty 50) rather than trying to beat it through active stock selection. Index funds typically carry a much lower expense ratio than actively managed funds, since there's no active research or trading decision to fund.
- Lock-in Period
- The minimum duration an investor must hold a fund before being allowed to redeem it. ELSS carries a mandatory 3-year lock-in; most other open-ended mutual funds carry none, though an exit load may apply for early withdrawal.
- Net Asset Value (NAV)
- The per-unit price of a mutual fund, calculated by dividing the fund's total assets (minus liabilities) by the number of units outstanding. A higher or lower NAV says nothing about whether a fund is cheap or expensive; only its underlying returns and costs matter.
- Portfolio Rebalancing
- Periodically adjusting a portfolio back to its target asset allocation after market movements have pushed it off course, for example by trimming equity that has run up and adding to debt that has lagged, to keep risk in line with the original plan.
- Systematic Investment Plan (SIP)
- A method of investing a fixed amount in a mutual fund at regular intervals (usually monthly) rather than as a lump sum. SIPs enforce disciplined investing and use rupee-cost averaging (buying more units when prices are low and fewer when prices are high) to smooth out market volatility over time.
- Systematic Withdrawal Plan (SWP)
- A facility that lets an investor withdraw a fixed amount from an existing mutual fund investment at regular intervals, the reverse of a SIP, commonly used to generate a regular post-retirement income stream from an accumulated corpus.
- XIRR (Extended Internal Rate of Return)
- The most accurate way to measure returns on investments made at irregular intervals, such as SIPs, top-ups, or partial withdrawals, because it accounts for the exact timing and size of each cash flow, unlike simple average return calculations.