Mutual Fund Basics: From NAV to IDCW

Open a mutual fund page for the first time and the numbers may not be the only confusing part. It is often the vocabulary around them.

NAV, NFO, AUM, TER, IDCW – these abbreviations can make a straightforward investment idea sound more technical than it needs to be. Understanding a handful of common terms can make a scheme page or factsheet much easier to read.

NAV: the value behind each unit

NAV, or Net Asset Value, represents the per-unit value of a mutual fund scheme. It is calculated using the value of the scheme's investments and other assets, after accounting for liabilities and provisions, divided by the number of units outstanding. SEBI's prescribed NAV computation follows this principle.

So, what is NAV useful for? It tells an investor the value of each unit, but does not predict how well the scheme will perform. A higher NAV also does not automatically make one scheme more expensive or less attractive than another.

NFO: when a new scheme is launched

The NFO meaning is New Fund Offer. It marks the initial period during which investors can subscribe to a newly launched mutual fund scheme from an Asset Management Company (AMC).

During this period, investors can subscribe to units at the offer price. Once the NFO closes, an open-ended scheme becomes available for ongoing purchase and redemption at applicable NAV-based prices after it reopens for continuous transactions.

An NFO should not be considered a bargain simply because its units are initially offered at a lower price than the NAV of an existing scheme. SEBI explains that the money raised during an NFO is invested according to the scheme's mandate. Its subsequent performance depends on the underlying investments.

AUM: the size of the assets being managed

AUM stands for Assets Under Management and refers to the value of assets being managed by a fund or investment manager on behalf of investors.

It is primarily an indication of scale. A larger AUM does not by itself mean that one scheme is a better investment than another.

Expense ratio: the cost of running the scheme

Managing a mutual fund involves costs, including investment management, administration and other permitted expenses.

The Total Expense Ratio, or TER, covers the permitted costs of running and managing a mutual fund scheme. These expenses are accounted for in the NAV rather than billed separately to investors.

Costs affect investor returns, but expense ratio should be considered alongside the scheme's investment approach and other characteristics.

Benchmark: a reference point for performance

A benchmark provides a reference against which a mutual fund scheme's performance can be viewed.

The appropriate benchmark depends on what the scheme invests in. An equity scheme, for instance, would typically be compared with an appropriate equity index, while a debt scheme would require a relevant debt-market benchmark. Someone looking at a balanced fund or another hybrid strategy should similarly consider the benchmark specified for that scheme.

A benchmark provides context for performance; it does not guarantee that a scheme will match or outperform it.

Exit load: what happens when units are redeemed early?

Certain mutual fund schemes may charge an exit load if investors redeem their units before a specified period has passed. The amount and applicable period can differ between schemes. An exit load is generally expressed as a percentage of the redemption value when an investor exits within the defined period.

The load structure is therefore worth checking before investing, particularly if the money may be needed sooner than planned.

IDCW: understanding the distribution option

IDCW stands for Income Distribution cum Capital Withdrawal, the term that replaced the earlier "dividend" nomenclature for mutual fund options.

Under an IDCW option, a scheme may distribute amounts to unitholders subject to the availability of distributable surplus and the scheme's provisions. Such distributions are not assured.

An IDCW distribution should not be seen as an additional return over and above the value of the investment. Investors may also encounter IDCW payout and reinvestment options. Under payout, the declared amount is paid to the investor; under reinvestment, the distribution amount is reinvested in the scheme and additional units are allotted at the applicable NAV.

Turning shorthand into useful information

Knowing what is NAV, understanding the NFO meaning, and recognising what AUM, expense ratio, benchmark, exit load and IDCW represent can make mutual fund information much easier to navigate.

The point is not to memorise every definition, but to understand what each number or label is telling you before making an investment decision.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Note to the reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint.