Mutual Fund Scheme Jargons Explained

If you are a first-time investor, you will be confused by the jargons or terms used by financial advisors. Here are some such mutual fund scheme jargons that you should understand so that you can have a more productive discussion with your financial advisor.

Benchmark

It is usually a market index like Sensex (in the case of equities) or a group of securities that are used as a standard to measure the performance of the investment in mutual funds.

Alpha

The value that your fund manager adds, over and above the underlying benchmark, to your investment in a fund is the alpha. For example, if Nifty 50 gives 10 percent returns and your fund manager is able to get you 12 percent returns, that the excess, that is, 2 is the alpha.

Beta

Beta is a measure of volatility risk and indicates how the portfolio reacts to the movements in the market. In order to do this, 1 percent or 1.0 is considered as the movement in the market. If the fund's portfolio is 1.2, it means that theoretically, it is 20 percent more volatile than the market, which means that it could either fall or rise 20 percent more than the market.

Entry and Exit load

Mutual fund companies will collect some amount as fee from investors when they join or leave a scheme and this is known as "load." If the entry load is 1 percent, then Rs 100 from a customer's Rs 10,000 investment will be deducted by the mutual fund company. Only Rs 9,900 will be invested.

As for exit load, these are imposed to discourage investors from leaving the scheme early. Suppose the exit limit is set as 6 months, if the investor decides to leave before that, the mutual fund company will deduct the decided fee from the proceeds of the scheme.

Rupee cost averaging

It is an investment technique used for schemes with regular fixed installments like a SIP. More units are bought when the share prices fall and lesser units are bought when prices rise. It is done to distribute the risk of investment across market movements.