Basic Mutual Fund Terminology Explained

PD Wealth
Oct 6
4 min read

Basic Mutual Fund Terms Explained Simply | PD Wealth

Why Understanding Mutual Fund Terms Matters

Investing in mutual funds is one of the most effective ways to build wealth over time — but the jargon can often be confusing. Terms like NAV, expense ratio, or AUM appear on every factsheet, yet few investors truly understand what they mean.

At PD Wealth, we believe that smart investing begins with clarity. This guide breaks down the most commonly used mutual fund terminologies — so you can make informed, confident investment decisions.

1. Net Asset Value (NAV)

NAV represents the market value per unit of a mutual fund. It’s calculated as:

NAV = (Total Assets – Total Liabilities) ÷ Total Number of Units Outstanding

It shows the price at which you buy or sell one unit of a fund. Example: If a fund’s total assets are ₹100 crore and it has 10 crore units, the NAV = ₹10.

💡 Tip: NAV changes daily based on the market value of the fund’s holdings. A higher or lower NAV does not necessarily mean better or worse performance — focus on percentage returns instead.

2. Assets Under Management (AUM)

AUM is the total market value of all assets that a fund manages on behalf of investors. It reflects both the size and popularity of a fund.

A growing AUM indicates increasing investor confidence.
However, a larger AUM doesn’t automatically mean better performance — management efficiency also matters.

3. Expense Ratio

The expense ratio is the annual cost charged by the fund house to manage your money.It includes management fees, marketing expenses, and other operational costs.

Example: If you invest ₹1,00,000 in a fund with a 1.5% expense ratio, ₹1,500 goes toward annual fund management costs.

Pro tip: Choose funds with a lower expense ratio when comparing similar performance — especially for long-term SIPs.

4. SIP (Systematic Investment Plan)

A SIP allows you to invest a fixed amount at regular intervals (monthly or quarterly). It helps you:

Develop investment discipline
Benefit from rupee-cost averaging
Harness the power of compounding

SIPs are ideal for long-term goals like children’s education, home buying, or retirement.

5. Lump Sum Investment

A lump sum investment is when you invest a one-time amount in a mutual fund scheme instead of monthly SIPs. It’s suitable for investors who have a large amount to invest and can stay invested for 3–5 years or more.

6. Benchmark

A benchmark is the reference index used to compare a fund’s performance. For example, a large-cap fund may be benchmarked to the Nifty 50 or Sensex.

If your fund returns 14% while its benchmark delivers 11%, the fund has outperformed by 3%.

7. Alpha

Alpha measures a fund manager’s ability to generate returns above its benchmark. A positive alpha means the fund outperformed; a negative alpha means underperformance.

Example: If a benchmark gives 10% returns and your fund delivers 12%, alpha = +2.

8. Beta

Beta indicates how volatile (or risky) a fund is compared to the overall market.

Beta = 1: Moves in line with the market
Beta < 1: Less volatile than the market
Beta > 1: More volatile than the market

9. Standard Deviation

This measures the consistency of a fund’s returns. A higher standard deviation means returns fluctuate more; a lower one means they’re steadier.

For risk-averse investors, funds with a lower standard deviation may be preferable.

10. Sharpe Ratio

The Sharpe Ratio measures risk-adjusted returns — how much return a fund generates per unit of risk taken. Higher Sharpe = Better risk-adjusted performance.

11. Exit Load

An exit load is a small fee charged when you redeem units before a specified time (usually 1 year).It’s designed to discourage early withdrawals.

Example: If the exit load is 1% and you redeem ₹1,00,000 before a year, ₹1,000 will be deducted.

12. Load-Free or No-Load Fund

A no-load fund doesn’t charge any entry or exit fee. Most mutual funds in India today are no-load, making them investor-friendly and cost-efficient.

13. Portfolio Turnover Ratio

This indicates how frequently the fund manager buys and sells securities in the fund.

High turnover = more frequent trading (possibly higher costs)
Low turnover = buy-and-hold strategy (lower costs)

14. Growth vs. Dividend Option

Growth Option: Profits are reinvested, helping NAV grow over time. Ideal for wealth creation.
Dividend Option: Fund periodically pays out dividends (now called IDCW – Income Distribution cum Capital Withdrawal).

For long-term investors, growth options usually deliver better compounding benefits.

15. Asset Allocation

Asset Allocation is how your investments are spread across asset classes — equity, debt, gold, etc.Proper allocation aligns with your risk tolerance, investment horizon, and financial goals.

PD Wealth helps you build customized portfolios that balance growth and stability through optimal asset allocation.

16. ELSS (Equity Linked Savings Scheme)

An ELSS is a tax-saving mutual fund under Section 80C, with a 3-year lock-in period. Returns are market-linked, and investments qualify for tax deduction up to ₹1.5 lakh per year.

17. Rebalancing

Rebalancing means adjusting your portfolio periodically to maintain the original asset allocation. It helps manage risk and ensures your investments stay aligned with goals even as markets fluctuate.

18. Open-Ended vs. Close-Ended Funds

Open-Ended: You can invest or redeem at any time (most mutual funds fall here).
Close-Ended: You can invest only during the initial offer period; redemption happens after maturity.

19. Securities Exchange Board of India (SEBI)

SEBI is India’s market regulator. It oversees mutual funds, ensuring transparency and investor protection.

Final Thoughts: Learn the Language, Grow with Confidence

Mutual funds are one of the easiest ways to participate in wealth creation — but understanding the terms is key to avoiding confusion and making smarter choices.

At PD Wealth, we simplify financial planning and mutual fund investing. Our experts help you select the right funds, monitor performance, and stay on course toward your goals.