Mutual Fund Terms Every Indian Investor Should Know (Plain Language Guide)

Last Updated on April 23, 2026 by Hemant Beniwal

“If you can’t explain it simply, you don’t understand it well enough.” – Albert Einstein

I have sat across from hundreds of investors over 25 years who nodded confidently when I mentioned NAV, then asked a question that revealed they thought a lower NAV meant a cheaper fund. Or investors who understood SIP as a product rather than a mechanism. Or investors who did not know what an exit load was until they tried to redeem and found less money than expected.

Mutual fund terminology can be learned in an afternoon. Not knowing it costs real money. This post covers the terms that appear most frequently and cause the most confusion.

AMC – Asset Management Company

The AMC is the fund house – the company that manages your money. HDFC AMC, SBI Mutual Fund, ICICI Prudential, Mirae Asset, Axis Mutual Fund – these are all AMCs. When you invest in a mutual fund, you are investing in a scheme run by an AMC.

The AMC appoints a fund manager who makes the actual investment decisions. The AMC charges you for this service through the Total Expense Ratio (TER). SEBI regulates AMCs and mandates disclosure of all charges, NAVs, and portfolio holdings.

One AMC typically runs dozens of schemes across different categories: large-cap funds, mid-cap funds, debt funds, hybrid funds, tax-saving ELSS funds, index funds. The AMC is the entity; the individual funds are the products.

NAV – Net Asset Value

NAV is the price of one unit of a mutual fund. It is calculated daily by dividing the total value of the fund’s assets (minus liabilities) by the number of units outstanding.

The most important thing to understand about NAV: a lower NAV does not mean a fund is cheaper or better to buy. A fund with NAV Rs 10 (typically a new NFO) and a fund with NAV Rs 400 (an older, established fund) are not in different price ranges the way stocks are. The NAV only tells you how many units you will receive for your investment. What matters is the underlying portfolio quality and the return generated over time.

This misunderstanding is actively exploited in NFO marketing. “Invest at just Rs 10 per unit” implies the fund is cheap. It is not. There is no inherent advantage to a low NAV.

AUM – Assets Under Management

AUM is the total value of all money managed by a fund or an AMC. A fund with AUM of Rs 50,000 crore is large. A fund with AUM of Rs 500 crore is small.

AUM size matters for some fund categories. Very large mid-cap and small-cap funds can face liquidity constraints – it becomes harder to buy or sell positions without moving the market price. A Rs 30,000 crore small-cap fund may struggle to deploy capital effectively in the smaller-company universe it invests in. This is why some small-cap fund managers periodically close fresh purchases when the fund grows too large.

For large-cap and flexi-cap funds, AUM size is less of a constraint. The large-cap universe has deep enough liquidity to absorb even very large funds.

TER – Total Expense Ratio

The TER is the annual cost of running the fund, expressed as a percentage of AUM. It covers the fund manager’s fees, administrative costs, marketing expenses, and distributor commissions (in regular plans). The NAV you see is already net of TER – it is deducted daily in small amounts from the fund’s assets.

TER matters enormously over long periods. A regular plan with TER of 1.8% versus a direct plan with TER of 0.3% on a Rs 50 lakh portfolio means paying approximately Rs 75,000 more per year in the regular plan. Over 15 years, compounded, this difference is in the range of Rs 20-30 lakh.

SEBI caps TER by fund size and category. Index funds and ETFs have the lowest TERs, typically 0.05-0.3%. Actively managed equity funds range from 0.5-2.5% depending on whether you hold direct or regular plans.

SIP – Systematic Investment Plan

SIP is not a product. It is a mechanism for investing a fixed amount at regular intervals – monthly, quarterly, or weekly – into a mutual fund. The amount is automatically debited from your bank account on a predetermined date.

SIPs work through rupee cost averaging: when the market is down, you buy more units for the same amount; when the market is up, you buy fewer. Over time, this averaging reduces the impact of market timing on your overall cost per unit. An investor who invested a Rs 10,000 monthly SIP in a diversified equity fund from January 2008 (right before the global financial crisis) and continued uninterrupted through the crash still generated positive returns by 2012.

The discipline of automation is as important as the averaging benefit. An SIP removes the decision to invest from the monthly agenda – it happens whether markets are up, down, or sideways.

SWP – Systematic Withdrawal Plan

SWP is the retirement income mirror of SIP. Instead of putting in a fixed amount regularly, you withdraw a fixed amount regularly. The remaining corpus continues to grow.

For a retiree with a Rs 1.5 crore corpus in a balanced advantage fund, an SWP of Rs 60,000 per month withdraws a portion each month while allowing the rest to compound. If the fund generates returns above the withdrawal rate, the corpus can sustain itself or even grow over time.

SWP is more tax-efficient than bank FD interest for investors in higher tax brackets because mutual fund capital gains are taxed at preferential rates versus FD interest which is taxed at slab rate. The tax advantage of SWP over FD interest is one of the most underutilised retirement planning tools in India.

STP – Systematic Transfer Plan

STP allows you to automatically transfer a fixed amount from one mutual fund to another at regular intervals – typically from a liquid or debt fund into an equity fund. This is used when you have a lump sum to invest in equity but want to reduce the timing risk of investing everything at once.

Instead of investing Rs 25 lakh directly into an equity fund in one shot, you park it in a liquid fund and set up an STP to transfer Rs 1 lakh per month into the equity fund over 25 months. This achieves the averaging benefit of a SIP while keeping the corpus earning liquid fund returns in the interim.

ELSS – Equity Linked Savings Scheme

ELSS is a mutual fund category that invests primarily in equities and qualifies for Section 80C tax deduction (up to Rs 1.5 lakh per year). It has a mandatory 3-year lock-in period – the shortest lock-in among all 80C instruments.

ELSS is generally the most efficient use of 80C capacity beyond EPF and home loan principal, because the investment also gives you long-term equity exposure. However, ELSS dividends are now taxable at slab rate since DDT abolition in 2020. Always choose the growth option for ELSS investments. And remember: the 3-year lock-in applies per SIP instalment, not from the date of first investment.

Entry Load and Exit Load

Entry load was the charge levied when you bought into a fund. SEBI banned entry loads entirely in 2009. There is no entry load on any mutual fund in India today.

Exit load is a charge levied when you redeem within a specified period – typically 1% if you redeem within one year for equity funds. After the specified period, there is usually no exit load. Check the fund’s scheme information document for the exact exit load structure before investing, especially if you may need the money within 12-18 months.

Open-Ended vs. Close-Ended Funds

Open-ended funds allow you to buy and sell units directly with the AMC at the current NAV on any business day. Most mutual funds in India are open-ended. You are never locked in beyond any applicable exit load period.

Close-ended funds raise a fixed corpus during an NFO and do not allow fresh purchases or redemptions after the NFO closes. They are listed on stock exchanges so investors can buy and sell on the exchange, but often trade at a discount to NAV. Close-ended funds are generally less investor-friendly than open-ended funds and should be evaluated carefully before investing.

Read: 7 Things We All Hate About Mutual Funds (Honest Edition)

You do not need to understand every term in every scheme document. You need to understand the terms that affect the decisions you make and the money you have.

Know what you own. Own what you know.