7 terms to learn before you go ahead with your first mutual fund investment
If you are a beginner in the field of investment, mutual funds might seem confusing to you. However, you will realise that’s not the case at all when time passes by. As you may know, mutual funds are a convenient and hassle-free form of investment that can be carried out on low initial investment as well. There are various options that you can choose from, to make your investment, such as SIP, lump-sum investment, etc. These funds are managed by an expert and everything is done by him, from researching about the scheme to making sure you get the right returns. In case you want to know how much money you will get at the time of return, you can use a compounding calculator to calculate the same.
Having said that, mutual funds involve a lot of terminologies that are very essential. We have put together a few terms that a first-time mutual fund investor must know about-
- Acid test ratio- It is also known as a quick ratio. This ratio is calculated by dividing the current assets by the current liabilities of an organisation. It shows whether the company has enough short term assets or cash to pay its immediate liabilities. This may not be the perfect method to find out the financial strength of a firm if there is an outstanding account receivable.
- Debt funds- Debt funds are mutual funds wherein you can invest in fixed income securities such as treasury bills, bonds, etc. You can invest in gilt funds, short term plans, fixed maturity funds, monthly income plans, and liquid funds if you want to invest in debt funds. It offers steady income but is comparatively lower than equity.
- Asset management company- An asset management company is an organisation that invests on the behalf of its clients in different investment forms such as bonds, stocks, master limited partnership, and many more. Basically, it is a company that is registered by SEBI which maintains investment and handles asset management decisions for mutual funds.
- Bond fund- In the case of a bond fund, pooled investment is made into vehicles such as bonds, mortgage-backed securities and other debt funds. Its primary goal is to generate monthly income for its investors. The bond fund also comprises a portfolio that includes government as well as corporate bonds.
- Ex-dividend date- It is the date on which the net asset value or NAV of mutual funds gets decreased by an amount that is equal to the dividend or distribution of the capital gains. It means the investors who purchased the bonds or stocks before the ex-dividend date will get the next dividend payment.
- Initial purchase- This refers to the minimum amount of money that is required to open a new account. The amount represents the monetary limitations that he has as a shareholder. The amount of initial purchase is an important aspect and should be considered while choosing a suitable mutual fund.
- Money market fund- It is a kind of mutual fund in which you can invest in only those instruments that are specified by the RBI as well as money markets such as treasury bills certificates, commercial papers, commercial bills, etc. There is a lock-in period of at least 15 days on these funds and these are regulated by SEBI.
There are several other terms in mutual funds as well. However, the ones that are listed above are some of the most important ones. You may now be able to understand mutual funds in a better manner, if not completely.