10 Common Mutual Fund Jargons Explained Simply

Summary: 

• Several mutual fund investors don’t understand the basic terms that directly influence their returns. 

• Expense ratio and Total Expense Ratio (TER) are “annual costs” deducted from the fund’s NAV.  

• NAV shows the “per-unit value” of a fund, while AUM shows the fund’s size. 

• Exit load is a penalty for early withdrawal. It is levied to discourage frequent selling and maintain portfolio stability. 

• By analysing rolling returns, CAGR, and XIRR, you can measure the performance of a mutual fund scheme.  

• SIPs and SWPs are “disciplined ways” to invest or withdraw money. These methods make mutual funds ideal for both wealth creation + regular income. 

Mutual funds are one of the most popular investment options in India. As per AMFI Monthly Note - December 2025, there were about 26.12 crore folios across 1,908 schemes. Primarily, the funds were mobilised in: 

• Open-ended schemes, which amounted to ₹14,66,359 crore. and 

• Growth- and equity-oriented schemes (particularly flexi-cap, sectoral/thematic, and small-cap funds), which accounted for inflows of ₹3,568 crore.

But want to know one irony? 

Most mutual fund investors invest blindly! They don’t understand major concepts and treat investments like a “set-and-forget” exercise.  

Don’t want to be a part of such a group? Below are ten mutual fund jargons you must know about before committing funds in 2026: 

1. MF Expense Ratio 

The expense ratio is the recurring “annual cost” charged by an Asset Management Company (AMC). Generally, it covers the following: 

• Fund management fees 

• Research costs 

• Record-keeping charges 

• Administrative expenses 

The MF expense ratio is expressed as a percentage of the fund’s assets. 

Are you supposed to pay it separately every year? 

No, it is automatically adjusted from the fund’s NAV (Net Asset Value). 

How? 

The expense ratio is: 

• Charged to the fund and 

• Then recovered from investors by reducing the NAV. 

As a result, you get to see a “lower NAV”. That’s why, ideally, investors prefer mutual fund schemes that carry a lower MF expense ratio. 

2. Total Expense Ratio (TER) 

The Total Expense Ratio shows the complete cost of running a mutual fund in one year. Realise that a mutual fund hire: 

• Fund managers 

• Research teams 

• Record-keeping agencies 

• Auditors 

• Custodians 

All these professionals charge fees for their services. Besides, the fund also incurs marketing and distribution costs. When all these expenses/fees are added together, the result is called the Total Expense Ratio. It is shown as a percentage of the fund’s total assets. 

Again, TER is not paid separately by the investor. The fund deducts these expenses from its assets regularly. Since the deduction reduces the fund’s assets, the NAV becomes lower. For example,  

• Let’s say you invest ₹10,000 in a fund with a TER of 1%. 

• Now, the fund uses about ₹100 in a year to cover its costs 

You do not see this as a direct charge, but your returns are lower by that amount. Therefore, just like the MF expense ratio, investors usually prefer a lower TER. 

3. Assets Under Management (AUM) 

AUM refers to the total market value of all the assets a mutual fund scheme manages on behalf of investors. It includes the value of all stocks, bonds, and cash held by the fund at a given point in time. 

It is worth mentioning that AUM changes daily because: 

• Market prices of underlying securities change 

• New investors add money 

• Existing investors redeem units 

Usually, a higher AUM shows the fund house has a strong reputation, and the particular scheme has performed reasonably well in the past (that’s why several investors put their money in the fund).  

However, always remember that AUM just tells you how big the fund is. It does not show how good a fund’s future returns will be.  

4. Exit Load in Mutual Funds 

Exit load is a fee charged when you redeem your mutual fund units before a specified period. For example,  

• Let’s say you invest ₹25,000 in a fund. 

• Assume that the scheme will charge an exit load of 0.50% when redeemed within 30 days from the date of purchase. 

• In this case,  

• Your exit load will be ₹125. 

• Your net redemption proceeds would be ₹24,875 (₹25,000 - ₹125).  

Note that this charge is deducted from the redemption amount (not from the NAV).  

But Why is it Levied? 

Realise that when investors withdraw money suddenly, the fund may be forced to sell its holdings to arrange cash. These forced sales can: 

• Happen at unfavourable prices and 

• Increase trading costs, such as brokerage fees 

If there were no exit load, these costs would be borne by the investors “who stay invested” and not by the “investor who exits”. That’s why exit load in mutual funds shifts this cost back to the exiting investor.  

Another reason is “portfolio stability”. Frequent inflows and outflows make it harder for the fund manager to maintain the intended asset allocation. Thus, exit load reduces unnecessary churn. 

5. Mutual Fund NAV 

NAV, or Net Asset Value, is the value of one unit of the mutual fund you hold. It is calculated using the following formula: 

NAV represents the fund's performance. Its value changes daily based on the market movement of the underlying assets held by the scheme. Usually,  

• A rising NAV indicates that the fund’s underlying assets have gained value whereas, 

• A falling NAV shows a decline 

For more clarity, let’s check out the several factors that impact mutual fund NAV: 

6. Rolling Returns of Mutual Funds 

Rolling returns show how a mutual fund has performed across many different time periods instead of one “fixed start” and “end date”. They measure returns for the same holding period (say 1 year, 3 years, or 5 years) but move the start date forward at regular intervals.  

For Clarity, Let’s Study an Example:  

For Clarity, Let’s Study an Example:  

Disclaimer: The returns shown above are hypothetical and used only for educational purposes. They do not represent actual index performance or future outcomes.

Now, let us calculate 3-year rolling returns. Each calculation assumes an investor stayed invested for three full years, but the starting year changes. 

A) First 3-Year Rolling Return (Year 1 to Year 3) 

• This assumes investment from the start of Year 1 to the end of Year 3. 
• Average return: (9% + 11% + 8%)/3= 9.33%

If an investor entered at the start of Year 1 and stayed invested for three years, the average annual return would be 9.33%. 

B) Second 3-Year Rolling Return (Year 2 to Year 4) 

• Now the starting point moves forward by one year.  

• Average return: (11% + 8% + 12%)/3=10.33%

An investor who entered one year later, at the start of Year 2, and stayed invested for three years, would earn 10.33%. 

C) Third 3-Year Rolling Return (Year 3 to Year 5) 

• The starting point again moves forward by one year.  

• Average return: (8% + 12% + 10%)/3= 10%

An investor who entered at the start of Year 3 and stayed invested for three years would earn 10.00%. 

Why Use Rolling Returns While Comparing Schemes? 

Note that single-period returns depend heavily on when the investment starts and ends. 

How? 

• Let’s say the start date falls during a “market low”. Now, returns may appear strong.  

• In contrast, if the start date is near a “market high”, the returns may look weak.  

Rolling returns remove this bias by testing performance across many starting points. Additionally, “point-to-point returns” answer only one question: 

• What return did the fund deliver during a specific period? 

Whereas, rolling returns in mutual funds answer:  

• How often did the fund deliver similar returns across different market phases? 

Usually, mutual fund schemes with consistent rolling returns show less volatility + more predictable performance. 

7. CAGR (Compounded Annual Growth Rate) 

CAGR shows the “average annual growth rate” of an investment over a specific time period. This metric assumes the investment grows at a constant rate every year. 

For example,  

• Let’s say an investment grows from ₹1,00,000 to ₹2,00,000 over 7 years. 

• Now, CAGR tells you the yearly rate at which this growth happened.  

• It smooths out yearly ups and downs (by averaging) and expresses the return as a single percentage. 

However, CAGR has a limitation. It assumes a “one-time investment” and “one-time exit”. It does not account for multiple investments/ redemptions made at different times. 

That is why CAGR is not suitable for SIPs or when irregular lump sums are invested. In such cases, XIRR is used. 

8. XIRR in Mutual Funds 

In mutual funds, investments rarely happen on a single date. You may: 

• Invest through SIPs every month or 

• Add lump sums at different times 

As a result, each amount stays invested for a different duration. For example,  

• Let’s say you start investing ₹1,00,000 in a mutual fund in January 2020. 

• You continue investing for five years until January 2025. 

• Now, the amount invested in January 2020 remains invested for the full 5 years. 

• Whereas the amount invested in January 2021 onwards remains invested for 4, 3, 2, and 1 year, respectively.  

What must you observe? 

Although the total investment period is five years, each lump sum stays invested for a different length of time. The earliest investment has the maximum time to grow, while the latest investment has the least time.  

In such situations, an XIRR (Extended Internal Rate of Return) is calculated. It gives a “single rate of return” using which you can calculate your total portfolio value.  

How Does XIRR in Mutual Funds Work? 

XIRR treats: 

• Investments as “cash outflows.” and 

• Redemptions or final value as “cash inflows.” 

It then finds the annual return rate at which the present value of all cash outflows equals the present value of all cash inflows. This rate represents how much your money has grown each year (after considering timing differences). 

Usually, XIRR in mutual funds is calculated using spreadsheets, which have built-in formulas to calculate XIRR.  

9. Systematic Investment Plan (SIP) 

An SIP is a method of investing a fixed amount at regular intervals (usually monthly) into a mutual fund scheme. Each installment is invested at the prevailing NAV, which leads to “rupee cost averaging”. This happens because you could buy: 

• More units when the NAV is low and 

• Fewer units when the NAV is high 

As a result, your buying price becomes an “average” and market fluctuations impact you less than a single lump-sum entry. 

10. Systematic Withdrawal Plan (SWP) 

An SWP allows investors to withdraw a fixed amount from a mutual fund at regular intervals. This withdrawal happens at the “prevailing NAV”. An SWP is usually preferred by retirees or investors looking for periodic income. 

In SWP: 

• Money remains invested in the fund 

• Units are redeemed periodically (say, monthly) to meet withdrawal needs 

• The remaining corpus stays invested  

Thus, SWP could also be referred to as a “gradual redemption scheme”, where only a portion of your investment is withdrawn at each interval.  

Conclusion 

So now you are aware of all the popular mutual fund terms you will frequently come across as an investor. Learning concepts like NAV, XIRR, rolling returns, SIP, SWP, AUM, and expense ratios gives you the knowledge to: 

• Better evaluate mutual fund schemes and 

• Select investments as per your risk appetite + financial goals 

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