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Glossary of Mutual Funds Terms ​

A

Asset Allocation

Division of an investment Portfolio among different categories such as equity, fixed income, liquid, gold funds, etc. It depends on age and ability to tolerate risk.

Account Statement

This is a summary of transactions (purchases, redemptions, dividends, etc.) in your mutual fund account over a specific time period.

Adjusted NAV

The Net Asset Value (NAV) of a unit after changes due to distributions like dividend declaration, bonus etc. have been calculated. It is assumed that reinvestments of distributions have been made to the investors at prevailing NAV for the purposes of calculating Adjusted NAV.

Age of Fund

Time period that has elapsed since the setting up of the fund.

Alpha

When your mutual fund investment has earned higher returns than its benchmark index, the difference between the two returns is called Alpha.

Alpha = Returns earned by your mutual fund investment minus benchmark index returns

Annual Return

The change in percentage in the Net Asset Value (NAV) of a fund over one year based on the assumption that distributions such as dividend payment and bonuses have been reinvested.

Applicable NAV

Net Asset Value (NAV) at which all investments and redemptions are processed for applications received before a particular cut-off time for a fund.

Application Form

Form that the investor needs to fill with all his details while investing in a mutual fund.

Appreciation

This means increase in the value of your investments.

Arbitrage

When a security is priced differently in two or more markets at the same time, one can make a profit by buying the security from the market where it is priced lower and selling in the market where it is priced higher. This is called arbitrage.

Automatic Investment Plan

It is a plan where a fixed amount is automatically debited periodically from an investor’s bank account and invested in the fund of his choice.

Average cost method

A method of calculating the cost per unit by adding up all costs incurred in purchasing all the units of an investment and then dividing the sum by the total number of units.

Average Maturity

Average Maturity is the average of different maturities of the securities, which make up a debt mutual fund’s portfolio.

Advisor

A person or firm offering professional financial advice.

Asset

Any tangible or intangible resource of economic value.

Automatic Reinvestment

An investment option where dividends declared by a fund are automatically reinvested back into the fund on behalf of the investor and fresh units issued against this reinvestment.

B

Balanced Funds

Balanced funds combine the growth potential of equities with the low volatility of debt. Usually they maintain 65% equity and 35% debt.

Balance Maturity Tenure of a Scheme

In case of close-ended schemes, the balance period that remains till the scheme can be redeemed is called the Balance Maturity Tenure of a Scheme.

BSE Sensex

A benchmark index that reflects the stock prices of thirty companies listed on the Bombay Stock Exchange.

Benchmark

A suitable index against which the performance of the fund is compared. For example, equity funds benchmark against sensex or nifty index.

Beta

Beta is a measure of the volatility or risk of a security or a portfolio in comparison to the market as a whole. Beta of 1 means that security's price will move along with the market. Beta of less than 1 means that the security will be less volatile than the market. Beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.4, it's theoretically 40% more volatile than the market i.e. if the market rises or falls by 10%, the stock will rise or fall 14% (1.4 x market).

Balance Sheet

A statement of assets, liabilities and capital of an organization at a point in time.

Bond income fund

A mutual fund that comprises of corporate or government securities. These funds are focussed on income rather than growth.

C

Capital Gains

Capital Gain is an increase in the value of an investment that gives it a higher worth than the purchase price. They may be short term or long term and must be claimed on income taxes.

Close-Ended Fund/Schemes

Close-ended funds exist for a fixed period of time.

Capital Growth

This is a rise in the market value of a mutual fund's securities, reflected in its net asset value per share.

Closed-ended Mutual Fund

Close-ended Mutual funds exist for a fixed period of time.

Compounding

When you decide to reinvest your investment income back into the investment, the income starts earning you more income. This is called compounding.

Coupon

The interest rate that a bond or debenture pays (indicated as a percentage of its face value). For example, if the face value of a bond is Rs 100 and it pays interest at 8%, this interest rate is called the coupon.

Cut-off time

This is the time specified by SEBI to determine the NAV at which your investment/redemption will be made. When you decide to invest in / redeem from a mutual fund scheme, you need to submit your request to the mutual fund. If your request is received before the cut off time, your investment/redemption is made at the NAV of that day.

D

Debt Funds

Debt Funds are the funds that invest in fixed income instruments like money, market instruments, bonds, government securities etc.

Dematerialization

The process of converting physical share certificates into electronic form.

Diversification

The process of investing across different asset classes (equity, debt, property, etc.) and across different investments within each asset class (for instance, investing across equity shares of various companies in case of equity) to reduce risk.

Dividend Distribution Tax

When a company decides to pay dividend to its equity shareholders or when a debt mutual fund scheme decides to pay dividend to its unit holders, they have to deduct and pay tax before distributing the dividend. This is called Dividend Distribution Tax.

Dividend payout option

A mutual fund investor can decide to receive dividends declared by the scheme (and not reinvest the dividend). This is called the 'dividend payout option'.

Dividend reinvestment option

A mutual fund investor can decide to reinvest the dividends declared by the scheme in order to purchase more units of the scheme. This is called the 'dividend reinvestment option'.

Dividend

This is the distribution of a portion of the profits by the company/ mutual fund to the shareholders/unit holders.

Dividend Frequency

This is the number of times in a year that dividend is distributed to the shareholders / unit holders.

Dividend History

The track record of the amount of dividend paid by a company/ mutual fund scheme till date.

E

Exchange Traded Funds

An ETC, or Exchange Traded Fund, is a marketable security, that tracks an index, a commodity, bonds, or a basket of assets like an index fund.

Entry Load

Fees that are required to be paid when one is investing in a fund.

Equity Linked Savings Scheme

A special product offered by mutual funds. The Equity Linked Savings Schemes (ELSS) give their investors the option of saving tax while participating in the growth of the capital market. An investment of up to 1,00,000 under ELSS qualifies under Section 80C of the Income Tax Act, 1961. As per the ELSS guidelines issued by the Central government, mutual funds have to ensure that at least 80 percent of the funds are invested in equities and equity-related instruments. Investors can sell back their units to the mutual fund at the NAV-based repurchase price after the lock-in-period of three years. The long term capital gains on sale of units are not taxable in the hands of the investor.

Equity Schemes

Growth funds that aim at providing capital appreciation over the medium to long term by investing a major part of their corpus in equities.

Expense Ratio

Expense ratio is the annual percentage of a fund’s assets that are paid out in expenses such as management fee and any other fee that is spent for the fund’s operation.

F

Fund Manager

Fund Manager- Who has the expertise to manage an investor’s money in line with the Mutual Fund’s stated investment objectives like income generation and capital appreciation.

Face Value

This is the original issue price of one unit of a scheme (usually Rs 10).

Factor Funds

Mutual funds that invest with a philosophy of investing with a particular factor or style. They are also called style funds at times.

Floating rate

Some debt securities reset the interest rate payable on the security depending on changes in the market interest rate. These debt securities are said to offer 'floating rate' of interest.

Folio number

A unique number assigned by a mutual fund to identify an investor's investment account with it.

Fund

An investment vehicle where resources of many investors are pooled for a common benefit.

G

Gilt Fund

A mutual fund that invests in government securities and treasury bills. As such, they stick to high quality debt instruments and have adequate liquidity.

Growth option

A mutual fund investor can decide not to receive any dividends from the scheme he has invested in. Instead, he would prefer to see his investment value grow. This is called the 'growth option'.

H

Holding Period

Duration for which a person stays invested in a scheme. Depending on the scheme type and investor requirement, this period can vary from 1 day to several years.

I

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising and consequently, the purchasing power of currency is falling.

Income / Debt Funds

Income / Debt funds aim to generate reasonably regular and a steady stream of income for its investors by investing in fixed income securities such as bonds, corporate debentures, etc.

Index Funds

Index funds are designed to replicate the portfolio of a particular index such as the S&P BSE Sensex, NSE Nifty, etc.

Investment strategy

A plan used to build an investment portfolio to achieve the desired objective.

Indexation

When you invest in a debt fund and decide to redeem it after more than a year, the income tax law allows you to increase the cost of your purchase based on the inflation rate. This is called indexation.

International Fund

Mutual fund schemes that invest abroad.

Investment objective

Every mutual fund scheme has an investment objective according to which the fund manager has to make investments for the scheme. For example, in case of an equity fund, the investment objective may be to invest in large cap companies across a range of sectors in order to give investors capital appreciation.

J

Joint Ownership

In a folio, the mode of holding cash can be Single, Joint or Anyone or Survivor. In case of joint ownership, both the investors should be KYC compliant and the taxation impact falls on the first holder.

Junk Bond

A bond which is rated below the investment grade and denotes high risk to the investor.

K

KYC (Know Your Customer)

KYC means the procedure prescribed by SEBI for identifying and verifying the identity of clients with the help of proof of address, identity card, and compliance with rules, regulations, guidelines, and circulars issued by the SEBI Board or any other authority for Prevention of Money Laundering from time to time.

KYC Registration Agency (KRA)

These are SEBI-registered agencies which maintain investor records on behalf of capital market service providers. This eliminates the need for different service providers to keep repeating KYC processes for the same customer over and over again.

L

Liquid Fund

Liquid funds invest in Debt and money market securities with maturity of up to 91 days only.

Liquidity

An asset is said to be liquid when it can be sold in the market quickly for cash. Investors are always advised to keep some assets that they can sell to get cash quickly in case of an emergency.

Lock in period

Lock-in period is the time period when the investor is not allowed to redeem the units that he has purchased in the mutual fund.

Load

Mutual funds charge fees to their investors in order to meet the expenses of maintaining the schemes. This is called a load. Usually the load is charged when investors redeem their units before completion of specific period.

Lock-in period

Lock-in period is the time period when the investor is not allowed to redeem the units that he has purchased in the mutual fund. He can sell them only when the time period expires.

M

Mid Cap Fund

A fund which invests in stocks of mid cap companies.

Management fee / expense

A fee charged by the professional fund manager to manage an investment portfolio on behalf of the investor.

Market capitalization

Market capitalization is the total market value of all the shares issued by a company at a given point of time. It is calculated by multiplying the total number of shares by the current market price of one share.

Market value

The market value of a security is the price at which it can be bought or sold on the exchange.

Market volatility

The prices of shares on the stock exchange constantly keep changing. The rate at which the prices change is known as market volatility. The higher the rate of change the greater the volatility, and vice versa.

Mark-to-market

This is a method of accounting where the value of an investment is recorded in the financial books as per its current market price. For instance, if a share has a market value of Rs60 on a given day, then an investor holding 100 shares of that company will update the market value of his investment to Rs 6,000 (100 shares x Rs 60 per share). This is called mark-to-market.

Maturity

Some investments such as close-ended funds have a maturity date, which is the date on which the investor is paid back his principal amount as well as all income due to him on that investment.

Money market instruments

Debt instruments that have a short maturity period, usually of less than a year.

Mutual funds

"Mutual fund is a collective investment mechanism that pools resources of many investors, issues them units and invests on their behalf." The mutual fund invests the collected funds in securities in accordance with the investment objective as disclosed in the Scheme information document of the scheme.

N

Net Asset Value

Net Asset Value is the worth in, in market terms, for each unit of the fund. It is calculated as the market value of all assets. In the fund less liabilities and expenses divided by the outstanding number of units in the fund. Most schemes announce their NAVs on a daily basis.

NAV (in Rs. Terms)= Market or Fair Value of Scheme's investments + Current Assets - Current Liabilities and Provision / Number of Units outstanding under Scheme on the Valuation Date

New Fund Offers (NFO)

When a mutual fund launches a new scheme and invites investors to invest in the scheme, it is called a New Fund Offer.

Nominee

An investor must appoint a nominee to receive his investments in case of his death. The nominee can be the spouse, a sibling, child, etc. Investors can even have more than one nominee.

Nifty

A stock index comprising the largest 50 stocks (by free float) of the National Stock Exchange.

Non-Performing Assets (NPAs)

Loans on which interest / principal repayment is not being made by the borrower as per committed schedule.

O

Operating Expense

These are the costs involved in running a mutual fund like transaction costs, advisory fees, marketing expenses, etc.

Objective of investment

Every mutual fund scheme has an investment objective according to which the fund manager has to make investments for the scheme. For example, in case of an equity fund, the investment objective may be to invest in large cap companies across a range of sectors in order to give investors capital appreciation.

Open-ended schemes

Open-ended funds are available for investors to purchase and redeem units continually on business days. Open-ended funds can theoretically exist in perpetuity.

P

Portfolio

A portfolio refers to the collection of investments (shares, bonds, etc.) held by a mutual fund scheme or owned by an investor.

Price of units

Price offered by a mutual fund for repurchase or sale of a unit on a daily basis.

Q

No glossary terms available

R

Repurchase/Redemption

When a mutual fund investor wants to exit from his mutual fund investment, he can sell back the units to the mutual fund and receive cash. The mutual fund 'repurchases' his units and the investor is said to 'redeem' his units.

Rupee cost averaging

Under this system, the investor buys units of the fund at regular intervals of time rather than buying them all at the same time. This allows him to take advantage of increases and decreases in the price of the units. Purchases at low prices offset the purchase made at high prices allowing him to hold the units at a reasonable average cost.

Redemption of units / repurchase

When a mutual fund investor wants to exit from his mutual fund investment, he can sell back the units to the mutual fund and receive cash. The mutual fund ‘repurchases’ his units and the investor is said to ‘redeem’ his units.

Refund

The return of money to the payer after the closure / failure of a transaction.

Rate of Return

The pace of growth of an investment, usually on a per annum basis, expressed on a base of hundred or percentage terms in other words.

Redeemable

An instrument that can be sold back to the issuer.

Redemption Fee

A charge levied on the redemption of a security.

S

Sale price

This is the price at which the mutual fund sells units of a scheme to investors.

Scheme Information Document

This is an information document, which is prepared by a mutual fund on the launch of a new scheme. It offers all details about the scheme like the price, time period, method of purchase, etc. The fund has to submit this document to SEBI to obtain its observation before the launch of the scheme. Investors are advised to read this document thoroughly before investing in the scheme.

Securities

These are financial instruments (equity shares, bonds, etc.) that can be bought or sold in the open market by investors.

Security transaction tax (STT)

Whenever a security is bought or sold on a stock exchange, a tax called Security Transaction Tax (STT) is charged on the purchase/sale.

Standard deviation

This is a statistical measure of the extent of variance of a fund's performance. A fund is said to have a higher standard deviation when its performance deviates widely; this indicates that there is a greater potential for volatility.

Statement of Additional Information (SAI)

This is a supplementary document to the main offer document of a mutual fund scheme. It contains additional or changed information about the scheme and its operations.

Switching facility

ThisThis is an option available to mutual fund investors to switch their investments, either fully or partially, between schemes offered by the same mutual fund and/or options (dividend payout, dividend reinvestment and growth).

Sales charge

A fee levied on the sale transaction of a security.

SEBI

Acronym for Securities and Exchange Board of India, which is the capital market regulator in India.

Sector funds

A sector fund invests in securities of a certain sector or industry such as Fast Moving Consumer goods (FMCG), pharmaceuticals, Information Technology, etc. as specified in the investment objective.

Stocks

A financial security that represents a part ownership of a business enterprise.

Systematic encashment / withdrawal plan (SEP / SWP)

A Systematic Withdrawal Plan (SWP) is a facility that allows the investor to withdraw money from his existing mutual fund account at predetermined intervals.

Systematic transfer plan (STP)

This is a combination of SIP and SWP; it is a strategy where an investor transfers a fixed amount of money from one scheme to another.

Securities transaction tax (STT)

This is a tax levied on the value of transactions in listed equity shares, derivatives and equity mutual fund units.

Systematic Investment Plan (SIP)

Under this system, the investor buys units of the fund at regular intervals of time rather than buying them all at the same time. Purchases at low prices offset the purchase made at high prices allowing him to hold the units at a reasonable average cost.

T

Total return

Sum of all sources of returns of an investment over a specified time period.

Transaction costs

Expenses and charges incurred in a particular financial transaction.

Tax Saving Fund

These are equity funds that offer tax benefit on investing. Currently There are two kinds of tax saving funds – Equity Linked Savings Schemes (ELSS) and Rajiv Gandhi Equity Saving Scheme (RGESS). These offer tax benefits under section 80C (for ELSS) and section 80GG (for RGESS).

U

Underwriter

An intermediary, usually an institution, which guarantees for a fee, the subscription of a specified minimum percentage of a securities offer.

Unit holder

An investor who holds mutual fund units.

Unit

Just like an investor buys shares of a company, he buys units of a mutual fund. A unit is nothing more than a share in a mutual fund scheme.

V

Vertical integration

The process by which a business entity acquires other entities that are above or below it in the supply chain (could be vendors or customers).

Venture Capital Fund

A form of risk funding of business start-ups.

W

No glossary terms available

X

No glossary terms available

Y

Yield

Yield is the dividend or interest that an investor gets on an investment. It is normally expressed as a percentage with respect to the current market price of the investment. Yield on a debt security = interest divided by market price of the debt security

Yield on an equity = dividend divided by market price of the equity share

Yield to Maturity (YTM)

Yield to Maturity or YTM is the yield expected on an investment if it is held by the investor till its maturity date.

Yield to Maturity

Yield to Maturity or YTM is the yield expected on an investment if it is held by the investor till its maturity date.

Z

Zero coupon bond

A bond that pays no coupons but compensates investors with price gains.