Understanding Mutual Fund Terminology

Table of Contents
Chapter 1: Introduction to Mutual Funds
Chapter 2: Categories of Mutual Funds
Chapter 3: Understanding Mutual Fund Terminology
Chapter 4: Mutual Fund Costs
Chapter 5: Buying Mutual Funds
Chapter 6: Tracking and Selling Mutual Funds

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Chapter 3: Understanding Mutual Fund Terminology
Net Asset Value
Entry and Exit Loads

Chapter 3: Understanding Mutual Fund Terminology

Here are some important terms used commonly with mutual funds. A good understanding of these will help you better assess different funds.

Net Asset Value (NAV)
The NAV is the current market value per share of the fund. It can be calculated as the fund’s total holdings less its liabilities and then divided by the number of shares of the fund. Typically, mutual fund companies calculate NAVs at the end of every trading day and it is this figure that helps determine the sale price of the shares of the fund. A sales fee will apply on every sale and this gets added to the NAV when the actual selling price is quoted to the interested buyer.

Entry and Exit Loads
Load refers to the fee which you may have to pay while carrying out a buy or sell transaction in a fund. Some funds may charge a front end load, which means you pay the charge when you purchase the shares. Others charge an exit load which comes into play when the shares are sold or redeemed. The exit load amount can vary depending on the period for which the fund has been held by the investor.

Some funds discourage very short term pull outs by imposing heavy exit loads for one year or two year terms. The front end load inflates the price you pay for shares in the fund while the exit load decreases what you stand to receive when you sell your shares. There are some no-load funds too, which do not charge commissions or loads either at the time of purchase or sale. However, you have to pay some maintenance fee to these funds too.

The return advertised on the mutual fund tells you how much you are likely to make on your investment amount in a year. There is no guarantee that this benchmark will be achieved. The success of the fund depends heavily on the expertise of the fund manager.

If the manager quits and a new one takes charge who is not as good, even a consistently outperforming fund may give poor returns. Many experienced investors look at the annualized returns to get a better idea of the fund’s performance over the past few years. The annualized returns represent an average of the returns delivered over 3 years, 5 years, 10 years, or any other time period.

Next Chapter: Mutual Fund Costs