Bharat Kalluri About Notes Projects

Understanding Mutual Funds

The amount of jargon here is staggering. I will try to write what I understand here

Regular vs Direct Funds

This one is simple, Regular funds are the funds where you pay a higher expense ratio since you go via a broker. Direct meaning there is no broker and you will directly go to the AMC (Asset management Company).

Expense ratio measures how much of a fund’s assets are used for administrative and other operating expenses. One thing to note is that expense ratio’s generally tend to be stable. A fund with low expense ratio stays low for a good amount of time.

Types of funds

  • Debt: These funds are maintained by Banks. When someone like the government or a private sector organization takes money from a bank, they take it at a fixed interest rate over a period of time. So, what is basically happening is that banks pool money through mutual funds and lend it to various gov/private org. and the return on the fund is the interest rate the org pays the bank back. This is usually a safe bet since most of the companies don’t completely default. But if they do, then the fund loses money, which means you lose on your returns/money.

  • Equity: These funds just straight up invest in stocks, there are a couple of types here like

    • Large Cap
    • Small Cap
    • Mid Cap
    • Multi Cap

    I think most of these names are self explanatory.

    • There is another type of Fund called ELSS (Equity linked savings scheme) , it is mandatory that 80% of the investments are in equity. The simple reason why people prefer equity is that the returns are usually higher. But also it means risk is higher.
    • Growth funds have stocks which are high in terms of their growth but less in terms of the amount of dividend (money paid occasionally by the company to the shareholder). You might find companies you might have never heard of, but the manager of the fund thinks are a good growth investment.
    • Index Funds: They invest in the index they refer to (SENSEX / NIFTY). No manager, so no expense.
  • Hybrid: They do both Equity and debt funds

Terms to understand

  • NAV (Net asset value) : It is the funds per share market value. In simpler terms, all the (assets - liabilities) / number of shares outstanding .
  • Exit Load : The amount of the fund you have to pay to the fund management organization if you exit the fund before the stipulated time.
  • CAGR (Compound Annual Growth Rate) : Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan. (I need to fully understand this yet)

Unanswered Questions

  • How is a mutual fund unit calculated?