Balanced fund

These funds invest in debt and equity instruments. The proportion of investment in debt and equity can vary and these funds offer a balance between risk and return.

Debt fund

Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities are known as Debt / Income Funds. These funds are low risk profile funds and generate fixed and regular income although these are less risky than equity funds; they are subject to liquidity risk, interest rate risk and credit risk (the risk that a bond issuer will fail to repay interest and principal on time). These funds can be further classified as debt funds, Fixed Term Plans, etc.

• Debt funds invest in a host of fixed income instruments i.e government issuances, corporate papers and short term papers.
• The Fixed Term Plan Series are closed-end schemes of varying maturities which invest as per their defined time line.

Entry load

The fees or charge paid by the investor at the time of buying units of a mutual fund is called the entry load.

Equity fund

Equity funds fall into the highest risk category for mutual funds and have the potential to offer the highest returns too. Ideally, like equities, equity funds must also be held for the long term, i.e. for 3 years or more. Equity funds can be further classified as aggressive funds, sector funds, large cap, mid cap or small cap funds, diversified equity funds, etc.

• Aggressive equity funds offer the maximum scope for capital appreciation as the funds invest in less researched and under owned shares. Such investments are most volatile and prone to higher risks than other types of equity funds.
• Sector funds/ Mid cap or small cap funds have stated criteria for investments and their portfolios comprise of only those companies that meet their criteria. Sector funds invest in a particular sector say banking, technology or pharmaceutical etc.
• Mid cap and small cap companies invest in companies with a mid sized or low market capitalization, respectively, as per their definition. These funds invest only in certain segments of the equity market and are thus, comparatively more risky than diversified funds.
• Diversified equity funds invest across the equity space into large, mid and small cap funds and have exposure to a host of sectors thereby reducing sector-specific or company-specific risks.

Exit load

A charge levied on an investor at the time of redemption of mutual fund units is called the exit load.

Gilt fund

These funds invest mainly in government securities.

Index fund

These funds invest in stocks that make up a particular stock market index (such as the BSE Sensex and NSE Nifty) in the same proportion as the weightage given to each stock in the index.

Inflation

Inflation can be defined as a sustained increase in the general price levels (wages, prices of goods and services) across the economy over a period of time.

Load

The purchase or redemption fee charged by a mutual fund when an investor purchases or sells units of the scheme, respectively, is called the load.

Mutual fund

Mutual funds are money-managing institutions which pool together money invested by a number of individuals and institutions and further invest it in various securities from the fixed income and equity space. The investor enjoys the gains of the fund and shoulders the losses in proportion to their contribution to the overall fund.

Net asset value (NAV)

The NAV of a scheme is the rupee value of one unit of that scheme. Broadly, it is calculated by dividing the total value of the fund by the number of units. More specifically, NAV = (Market Value of the fund's investments + Current assets + Accrued Income - Current Liabilities - Accrued Expenses) / Number of units outstanding.

Power of compounding returns

Systematic Investment also gives you the benefit of compounding returns. Compounding works best when you begin early as the returns on returns deliver a snow ball effect to your investment.

For instance, if you start investing Rs 2,500 per month from the age of 25 years, in an instrument that offers 8 per cent return per annum, then, by the time you reach 65 years of age, you will collect Rs 77.72 lakh. But if you delay your investment by just 10 years, even if you raise the annual investment amount to double (i.e. Rs 5000 per month) you will land up with just Rs 67.97 lakh.( Refer to the table)

Rupee cost averaging

Over the long run, systematic investment brings down an investor's average cost per unit. This is how: If you invest Rs 3000 in a mutual fund XYZ at an NAV of Rs 10, you will get 300 units. But instead of the one time investment you invest regularly for three months (assuming the NAVs at the time of investment are as depicted in the example below), you'll get 308.54 units. Thus, the average cost per unit comes down to Rs. 9.83 (Refer to table to below).

Systematic investment plan (SIP)

An SIP is an investment strategy offered by mutual fund houses, where one invests fixed amounts at regular pre-determined intervals (monthly or quarterly) in a mutual fund scheme. The number of units one gets each time depends on the prevailing Net asset value at the time of the investment. The higher the NAV, the lower the number of units and the lower the NAV the more units the investor will receive.