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Financial Jargons Thrown at Every Newbie

Ganesh D

SID, SAI, KIM, NAV, SIP, AUM, AMC and so on… No, these are not nicknames or slangs, these are the terms in finance which might sound very complex, but the truth is they are not as complicated as they sound to be.

The Investment management industry speaks a language completely alienating the customers and this language might create unwarranted stress, might shoot down your confidence and generally keep you away from investing.

So today we will be looking at the most common phrases you will get to hear when you start or even plan to startyour investments in mutual funds.

1. AMC: An Asset Management Company (AMC) is the fund house that manages the funds. It invests the client’s pooled funds into securities that match their financial objectives. These companies provide a lot of options to invest and tries to minimize their risk in the best way possible. Examples of AMC’s in India are ICICI Prudential, HDFC, Aditya Birla, Franklin Templeton among others.

2. SID: Do you remember the rap you hear after every advertisement fora mutual fund? Well they are just asking you to read Scheme Information Document (SID). It contains all the information you need to know about the scheme. It gives the highlights and the summary regarding the scheme and details like the indicative fund allocation, the fund manager, the expense ratio etc.

3. Folio Number: Just like a bank account number, it is a unique number to identify your holdings with the respective mutual fund. A folio number is given when the mutual fund units are allotted to you and you are required to quote the folio number to find out the value of your investments digitally. You can make multiple purchases by using the same folio number within the same fund house and this means it makes it very simple and easy to track all your investments rather than following up with each and every fund you have invested in. A folio number might also act like a way to ensure authenticity of the investor by the fund house.

4. Fund Rating: Just like CIBIL assesses the creditworthiness of individuals, fund rating agencies does the same for mutual funds. Fund rating agencies generally rate mutual funds based on the fund's past performance, the manager's skill, risk, cost adjusted returns and performance consistency. These mutual fund ratings are designed to help investors quickly identify mutual funds to consider purchasing for their investment portfolios. However, this rating will not point you towards a fund with more return potential. The most popular fund rating agencies are Morningstar, Value Research, CRISIL and ICRA.

5. Scheme Riskometer: A riskometer is a pictorial depiction of the risk profile of a mutual fund scheme. It shows the level of risk associated with the principal amount invested in a mutual fund. The classification is by Low risk, Moderately Low risk, Moderate risk, Moderately High risk and High Risk all identified by different colour codes.

6. NAV: Net asset value represents a fund's per share market value. It is the price at which investors buy units from a fund company and redeem them. It is calculated by dividing the total value of the assets of the fund, less any liability, by total number of units issued by a mutual fund. A NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities. The NAV is like the score that fluctuates so the difference between the price you buy the units for and the current NAV is your gain or loss :)

7. Lock-in Period: Period during which an investor is restricted from selling or redeeming which means your money will remain locked in with the mutual fund company for that period of time. For example, in case of ELSS the lock-in period is 3 years.

8. Benchmark: A benchmark acts as a reference point against which the performance and stock allocation of a mutual fund scheme are compared. It is also known as the benchmark index of the mutual fund scheme. Selection of a benchmark is decided based on the investment objective and asset allocation pattern of the scheme. For example, if you are investing in ICICI Prudential Blue Chip Fund (which predominantly invests in large cap stocks) then the Nifty50 is your benchmark because of the similar category of investments. If the ICICI fund delivers higher returns than the Nifty50 then it is said to have out performed the market index and similarly if the ICICI Fund fares lesser returns than the Nifty 50 it means the fund has under performed.

9. Units: An investor, by paying money to a company subscribes for shares. Similarly, by contributing into mutual fund scheme, an investor subscribes for the units. A unit holder of a mutual fund scheme is a part owner of the fund’s assets. So units are the measure in numbers used while buying or redeeming the mutual funds. For example, Mr.Aditya wants to invest INR 100,000 in funds with NAV of 100 then it means the number of units bought are 100,000/100 = 1000 Units and similarly in another way if he wants to redeem amount worth INR 20,000 when the NAV is 80 then the number of units redeemed will be 20000/80 = 250 Units. So “Units” is a way to measure the amount of investment and redemption from the mutual fund.  

10. Exit Load: Exit load is meant as a barrier to ensure that investors don’t redeem & churn their holdings in short term and keep their investments for a minimum stipulated time frame. Exit load is charged to the investor on NAV at the time of selling the mutual fund units. For instance, if the NAV is Rs 100 and the exit load is charged at 1% for withdrawal before the lock-in period, the investor will receive Rs 99.

So here you are now understanding the important terms thrown around you while watching business news, or while you read blogs on the internet.

This is the first part of the financial terms and stay tuned for part 2. Thanks for reading :)

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About the Author
Ganesh D
Ganesh is an associate at 7Prosper. Loves personal finance as it has all the power to change and better lives. The synergy between education and commitment to help clients create financially secured lives is what helps him excel. When not in the finance bubble, he is a part entrepreneur and a part nerd.

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