Mutual Fund terminologies simplified Fund terminologies simplified

Asset Management Company  

An asset management company (AMC) is a firm that creates a pool of funds through funds received from diverse investors. The funds collected (pooled) are used to invest in various asset classes such as, equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. AMCs are principally responsible for driving the mutual fund business. Asset management companies are colloquially referred to as money managers or money management firms. 

 New Fund Offer (NFO):

Any new fund offering from any AMC is called a New Fund Offer (NFO). This is very similar to an IPO where equity shares are offered to the general public. Generally NFOs are offered at NAV of Rs, 10 each at the time of opening.  The funds raised from investors (public ) are utilized to buy securities like equity shares/ government bonds etc, as per the stated objective of the fund/ scheme.

Net Asset Value (NAV):

Net Asset Value is the net value of an investment fund’s total assets minus its liabilities, divided by the number of units outstanding. The performance of a mutual fund is denoted by the Net Asset Value- NAV. The NAV of a mutual fund scheme changes on a day to day basis since the market value of the funds assets change everyday. The NAV of a mutual fund is determined after the close of a trading day.

Open-Ended and Closed-Ended Funds 

Open-Ended Funds are mutual funds where an investor can add to or exit their investment at any time after the investment is made. Open-ended funds do not have the investor bound for a specific period of time. 

Closed-Ended Funds are funds in which units can be purchased only during the initial offer period (NFO). The units can be redeemed at the specified maturity date. Interval mutual funds are a cross between open-ended and close-ended funds. It allows transactions at specific periods. Investors can choose to purchase or redeem their units when a trading window opens. 

Face value

It is the original price of a unit of a scheme. 

Expense Ratio: 

As the name suggests, is the management fee paid to the fund company for the benefit of owning and running all expenses of the fund. Of course, lower the expense ratio, better for the investor.

Exit Load: 

Exit load is a fee charged by the mutual fund houses if investors exit/ redeem investment, partially or fully, within a lock in period from the date of investment. Typically, an equity oriented scheme has exit load if investments are redeemed within one year from date of investment. One reason for exit load in equity oriented schemes is to inculcate a long term investment approach. 

Sharpe Ratio 

The Sharpe ratio is a measure of risk-adjusted return of a mutual fund portfolio. It describes how much excess return you receive for the volatility of holding a riskier asset (equity). The higher the sharpe ratio the better the returns have been in comparison to the investment risk taken. 

Age of Fund

It is the year and date of when the fund had first begun to the current year and date. This tells us how old the fund is and shows us the performance of the fund from its inception.

Annual Returns

It is the percentage change of the NAV over the period of a single financial year. Annualized returns are calculated to understand the performance of the fund/ scheme over a period of one year from date of investment.

Asset Allocation

It is the process of diversification of risk in a portfolio or a fund. This involves distribution of capital across various assets such as equity, bonds etc, depending on the objective of the fund and terms of risk and return. 


These are some of the terms you might come across while understanding mutual funds, we hope this clears some doubt that you may have had from all the financial jargon. 

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