INVESTING IN MUTUAL FUND - BASIC TERMS (PART-2)

Hello, Readers. I trust everyone is doing well. Before we dive into this, please make sure you've read Part 1 of the article.

I hope you've had a chance to review it. Welcome back, and let's continue exploring the remaining terms. 

Large-Cap Fund: primarily invest in stocks of large, well-established companies with a significant market capitalization. These are typically industry leaders and household names. Large-cap stocks are generally considered less risky compared to smaller companies. As a result, large-cap funds tend to offer relatively stable returns with lower volatility.

Mid-Cap Fund: Mid-cap funds invest in stocks of medium-sized companies. These companies are smaller than large-caps but larger than small-caps. They are often in a growth phase and have the potential for significant expansion. Mid-cap stocks can be riskier than large-caps but potentially offer higher returns. Mid-cap funds strike a balance between risk and growth potential.

Small-Cap Fund: Small-cap funds concentrate on stocks of smaller companies with a lower market capitalization. These companies may have more growth opportunities but also tend to be riskier and less established. Small-cap stocks have the potential for higher returns, but they are more volatile and may be less liquid. Small-cap funds are suitable for investors with a higher risk tolerance.

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Sectoral or Thematic Fund: Sectoral or thematic funds focus on a specific sector, industry, or theme within the economy. For example, they may concentrate on technology, healthcare, real estate, or emerging markets. The risk and return profile of sectoral funds depends on the performance of the chosen sector or theme. These funds can provide opportunities for targeted investments but may carry additional sector-specific risks.

XIRR (Extended Internal Rate of Return): it is a financial metric used in the context of mutual funds and other investments to calculate the annualized rate of return, taking into account the timing and size of various cash flows, such as investments, withdrawals, and dividends or interest received. It's a way to assess the actual annualized return on an investment when there are multiple cash flows occurring at different points in time. When we do investments in SIP mode, XIRR is the right metric to measure our returns.

CAGR "Compound Annual Growth Rate”: It is a financial metric used to measure the annualized growth rate of an investment or asset over a specified period, assuming that the investment grows at a compounded rate, which means that gains or losses from each year are reinvested or compounded into the next year's value. CAGR is useful for understanding the consistent annual growth rate of an investment, especially when it has experienced fluctuations over time.

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Open ended / close ended: Imagine an open-ended fund as a store that never closes its doors. You can go in (buy shares) or leave (sell shares) whenever you want, just like a convenience store open 24/7.

Think of a close-ended fund as a store with a limited number of items available for sale. Once those items (shares) are sold, no more are created or sold by the fund company.

Factsheet: A mutual fund factsheet is a document provided by mutual fund companies or investment management firms that contains essential information about a specific mutual fund. It serves as a concise and standardised source of information for investors to help them make informed investment decisions. It provides the fund’s full info like Fund Name and Symbol, Fund Objective, Fund Category, Performance Data, Risk Profile, Asset Allocation, Top Holdings, Dividend and Distribution Information, Expense Ratio, Minimum Investment, Manager Information, Contact Information, Key Dates.

Minimum Investment: The minimum amount of money required to invest in the fund, which can vary depending on the share class and investment platform.

Benchmark: Certainly! Think of a benchmark in simple terms like a measuring stick or a standard that helps you know how well something is doing. Imagine you're a chef, and you're making a delicious pizza. To make sure your pizza tastes great, you want to know how it compares to the best pizza in town. So, you use the best pizza in town as your benchmark. If your pizza is just as good or even better, you know you've done a fantastic job!

Direct plan: It's like buying a product directly from the manufacturer or source, skipping the middleman or retailer. It's designed for investors who want to invest in a mutual fund without involving intermediaries like financial advisors, brokers, or distributors. So lower expense ratio and higher returns.

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Regular plan: In simple terms, a regular plan in a mutual fund is like buying a product through a middleman, such as a shopkeeper. When you invest in a regular plan, you go through a financial advisor or distributor who helps you choose and buy mutual fund units. When you invest in a regular plan, a portion of your money is used to pay commissions and fees to these intermediaries. These costs are built into the mutual fund's expenses, often resulting in a slightly higher expense ratio compared with direct plan.

I believe I've covered all the fundamental terms essential for our mutual fund investment journey. Our series will persist, and in the next installment, we'll delve into "ratios." In the meantime, I encourage you to thoroughly absorb the content presented in these two parts and consider applying your newfound knowledge by examining funds in practice. 

Share your experience in the comments section.