August 23 , 2012
Before you start investing in mutual funds, it is important to be conversant with some terms in this industry: NAV, Units, Growth, Dividend, AUM, NFO, Registrar and Benchmark.
Say you are out to buy apples. The vendor quotes you the price of one apple, and you buy a dozen. In mutual fund parlance, each apple is a Unit of the fund, and the price of a Unit (an apple) is called the Net Asset Value (NAV). So, what you pay is:
Purchase Value = NAV*(No of units)
Sale works in the same way. The number of units you hold stays the same, but the price (NAV) changes, and you accordingly realize the sales value.
You have to choose between Growth option and Dividend option in almost any mutual fund scheme. In the context of the above, in the Growth option, the units stay the same and NAV keeps increasing as the fund does well. In the Dividend option, every time the NAV increases by some amount, the increase is converted into money and paid back to the investor. Thus, the NAV falls back again.
Assets Under Management (AUM) denotes how big the fund is. The fund can become big either by attracting more customers to invest money (selling more Units) or by performing well so that the NAV increases. Funds regularly report the AUM numbers for each scheme - anything above Rs. 300 cr denotes a stable fund.
A New Fund Offer (NFO) denotes the launch of a new scheme. Historically, this has been the time the fund and distributors have created a lot of publicity to try and ensure good sales. However, since the industry is already mature today, there is no reason for you as an investor to consider NFOs seriously. There are good existing funds you can invest in and redeem whenever you want. A new fund carries no special advantage - rather, it carries the risk of lack of track record.
The Registrar is the person who handles all the processing and operations - checking your form, sending you the statements, answering your process queries, etc. There are 3 major registrars - Franklin Templeton uses its own Registrar; HDFC, ICICI, Birla, SBI, DSP Black Rock, etc use CAMS as their Registrar; while Reliance, UTI, etc use Karvy as their Registrar. You may search online and note the Registrar office nearest to you, for your own convenience.
A few other self-explanatory terms are Returns and the Fund Manager. Returns simply measure change in NAV over a period of time. It is typically useful to convert all Returns into annual basis, so that comparisons can be done. A fund also has a benchmark to compare its returns against. Regardless of what it gives, however, you can stick to one of three Benchmarks - the Nifty for equity funds, the fixed deposit rate for debt funds and the gold prices for gold funds.