Mutual funds are now a widely pocketed investment avenue because of the comfort and opportunity they offer in terms of disciplined investment as well as enabling an investor to build a corpus over the years of investment.
Here are a few important mutual fund terms that you definitely need to know:
1. Net Asset Value:
Before we go on to understand this concept we know that mutual fund companies invest the corpus collected from investors in varied assets such as stocks, bond etc. and now their value changes over time.
But NAV is a representation of all the assets that form the part of the mutual fund. Though NAV seems to be an important metric for a novice investor, there are other factors associated with the mutual funds that cannot be overlooked such as the fund's past performance, AUM, risk profile etc.
The NAV of one fund cannot be compared to the other and it is only when the markets are low, funds shall carry lower NAV and this implies that investors will be able to get higher number of units in such a market state.
2. Alpha and beta of a mutual fund:
These are two measures used to understand the investment vehicle's past performance. Alpha primarily suggests the fund manager's performance i.e. the work put in by him or her in ensuring that the fund performs better than the benchmark. The fund's performance is typically measured in comparison to the benchmark. So, when the alpha is positive, it implies that the fund manager's performance relative to the benchmark is good and in the other case it is not.
Beta: This measure highlights the sensitivity of the fund to the changes in the benchmark indices. The metric can hence signify how stable the fund's performance have been when the market faced turbulent times.
Beta with value 1- It symbolizes that the fund is showing volatility at par with the benchmark index
Beta value of more than 1: Fund's beta value of over 1 denotes that the fund is showing higher variation in comparison to the benchmark index.
Beta value of less than 1: Implies a lesser volatility in the fund in comparison to the benchmark value.
3. Rolling returns:
It is the average annualized return calculated for a certain specified period say on a per day basis or every week or month and computed till the last day of the period. The rolling return concept works to provide us with the fund's absolute and relative performance over some time period. Say for instance: Returns every 6 month between 2012-2020.
By such an analysis, actual performance of the fund is known in terms of consistency during different periods of uptrend and downtrend.
4. Tracking error:
This is an important term when we go to choose an index fund, as the choice has to be made considering the tracking error in mind. Lower the tracking error, better is the index fund considered to be.
Tracking error: It is nothing but the difference in the fund's and benchmark return and lower it is, better it is from investors point of view.