Mutual Funds Jargon

Nowadays whenever you start looking for a good investment option, you inadvertently come across Mutual Funds. Almost every financial company has now launched a bunch of mutual funds. Every financial planner seems to be offering this as a solution to your investment needs. However, sometimes financial planners try use some jargon about mutual funds, which common investors are not able to understand. My purpose of writing this article is to explain such commonly used terms regarding mutual funds.

1. Mutual Funds: Let's start with mutual funds itself. I have explained the mutual funds in complete detail in my article titled "What the Hell Are Mutual Funds?". Just to summarize, mutual funds are investment vehicles set up by fund management companies. They take money from investors and form a pool of funds. Those funds are invested in various stocks and debt instruments. The profit or loss accrued from such investments is passed on to the investors in proportion of their investment.

2. Net Asset Value(NAV): This is the value of each unit of the mutual fund. This represents the value of the underlying investments of the fund. If the assets held by fund grow in value, the value of each unit of the mutual funds increase. And thus, its NAV increases. This is the value at which investors buy or sell mutual funds.

3. Entry Load: There is no such thing as a free lunch. Similarly, mutual funds also do not come free. There are various fee and charges associated with a mutual fund. The first among them is Entry Load. This is the amount that you have to pay to fund company when you are buying a fund. This varies from zero to a few percentages. Normally, debt based funds have a lower entry load as compared to an equity based fund.

4. Exit Load: Similar to entry load, this is the amount that you have to pay when you sell a mutual fund. Entry loads and exit loads are present basically to discourage investors from frequently buying and selling the mutual funds. Fund houses want investors to stay invested in the fund for long term.

5. Fund Management Expenses: These are the charges that fund management company deducts from your fund as a fee to their managing of your funds.

6. Open-Ended Funds: This is the first classification of funds. These are those mutual funds in which investors can enter or exit at any time. There is no lock in period. These kinds of funds normally happen to be more volatile.

7. Closed - Ended Funds: These are the funds in which there is a lock in period and a pre-defined interval during which investors can enter or exit the fund. The lock in periods is normally 3 years, and it varies from fund to fund. These funds tend to me more stable as fund manager gets the liberty to take a long look on stocks.

8. Equity Funds: Second kind of classification of funds is based on their investment style. Equity funds are those that invest primarily in stocks. These funds gain/loose when the value of underlying stocks increase or decrease. These funds also gain by dividend issued by underlying stocks from time to time. As these funds invest in stocks, so they are riskier by nature.

9. Debt Funds: These are also known as income funds. These funds invest in debt based investments such as government bonds and securities. These kind of funds are much safer. However, normally they give very less profits as compared to equity funds.

10. Hybrid Funds: These are a mix between equity funds and debt funds. These kind of funds invest a portion of their money in stocks so as to earn more profit, and they invest the remaining part of their money in debt instruments. This gives a true combination of better returns coupled with lower risks.

I guess I have covered most of the terms that your financial planner might use to impress (or confuse) you. I hope these will help you in making better informed decisions while making your selection for mutual funds.