Mutual fund glossary


Know the terms commonly associated with your mutual funds

Account Statement: It is the document issued by the mutual fund, giving details of various transactions and holdings of an investor in schemes of the fund.

Adjusted NAV (Total Return): The Net Asset Value of a unit adjusting for all changes caused due to dividend declaration, bonus etc. assuming reinvestment of distributions made to the investors at the prevailing NAV.

Annual Report: It is the record of a mutual fund's performance in a year. Under SEBI's guidelines, it is distributed to investors and/or shareholders.

Annual Return: The percentage change in net asset value of any fund over a horizon of one year, assuming reinvestment of distribution such as dividend payment and bonuses.

Annualised Returns: It is the absolute return over a period either greater or less than a year aggregated to a period of one year.

Applicable NAV: The applicable NAV, is the NAV at which the mutual fund transaction is executed, if the application is received before the cut-off time on a day as set by the fund. All investments or redemptions are processed at that particular NAV. A different NAV holds if received thereafter.

Asset Allocation: Asset allocation refers to a strategy of diversifying the risk associated with a fund and refers to the distribution of total funds available with the fund into various asset classes such as stocks, bonds etc. based on the funds investment objective.

Asset Management Company (AMC): It is the investment manager for the mutual fund. It is a company set up primarily for managing the investment of mutual funds and takes investment decisions in accordance with the scheme objectives, deed of Trust and other provisions of the Investment Management Agreement.

Automatic Investment Plan: A plan that enables the investor to give the mandate of allotting fresh units at specified intervals (monthly, quarterly) against which the investor provides post-dated cheques. On the specified dates, the cheques are realized by the mutual fund and on realization, additional units are allotted to the investor at the prevailing NAV.

Automatic Reinvestment Plan: An investment option available to mutual fund unitholders in which the proceeds from the fund’s dividends, bonus, etc. are automatically used to buy more units of the fund.

Average Cost Method: It is the method of finding out the cost per unit by adding up all the costs involved in purchasing all the units of investment and then dividing the sum by the total number of units.

Balance Maturity Tenure of a Scheme: It is defined in the case of close-ended schemes as the balance period remaining till the redemption of the scheme.

Balanced Funds: A class of mutual fund that aims at allocating the total assets with it in the portfolio mix of debt and equity instruments.

Bear Market: It is a period in capital market when investors are on a selling spree and the share prices are going down.

Benchmark: It is a standard against which a scheme's performance can be compared. For example, the performance of a large cap oriented equity fund can be benchmarked against BSE Sensex.

Beta: It is the measure of the relative sensitivity of a stock or mutual fund to the market. The market is assigned a beta of 1. The higher the beta, the more sensitive the stock or fund is considered to be relative to the market as a whole. In other words, funds with beta more than 1 will react more to any fluctuations (whether upward or downward) in market than funds with beta less than 1.

Blue Chip Stock: Stock of a major corporation with a long, fairly stable record of earnings and dividend payments and with good expected future growth.

Bond: A debt security issued with an interest-bearing promise to pay a specified sum of money due on a specific date in the future (maturity date).

Bonus: Bonus is an allocation of additional units to the investors on the basis of their existing holdings. Basically, there is a split of existing units into more than one unit resulting in the reduction of the NAV per unit.

Broker: A broker is an intermediary who guides the investors on one or more investment avenues available to an investor and facilitates the process of investment.

Brokerage: It is the fee payable to a broker for acting as an intermediary in a transaction (normally a buy transaction). For example, brokerage is paid by a fund to a broker for getting fresh investments from investors.

BSE Sensitive Index: An index reflecting the stock prices of 30 companies listed on the Bombay Stock Exchange (BSE) which is taken to be representative of the stock market movement. It is usually considered as the benchmark index for performance evaluation of equity funds.

Bull Market: Period during which the prices of stocks in the stock market keep continuously rising for a significant period of time on the back of sustained demand for the stocks.

Capital Gains: The profit gained on sale of securities and certain other capital assets (including units of mutual funds) are called capital gains. The gains can be classified into long-term or short-term depending on the period of holding of the asset and are charged to tax at different rates. Gains on mutual fund units held for 12 months or more are long-term gains.

Certificates of Deposit (CD): Certificate of Deposit (CD) is issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Bank CDs have maturity of 91 days to one year.

Close-ended schemes: These are schemes launched by mutual fund houses, wherein, one can invest only during the new fund offer period. Once this is over, one cannot invest. These schemes can have a debt or equity mandate. Also, they have a pre-specified maturity period or a lock-in, after which the scheme may either become open-ended or wind up its operations and return the investment to the investors, calculated in accordance with the net asset value (NAV) on the maturity date. However, the second option is rarely exercised for equity close-ended schemes. These schemes are listed on either the Bombay Stock Exchange or the National Stock Exchange after the NFO period ends.

Commercial Paper: Commercial paper (CP) is a short term, unsecured instrument issued by corporate bodies (public & private) to meet short-term requirements of working capital. Maturity varies between three months to one year.

Compliance Officer: Officer appointed by the AMC (asset management company) to comply with various regulatory requirement and to redress investor grievances associated with the funds.

Corpus: The total amount of money invested by all the investors in a scheme.

Coupon Rate: The annual rate of interest payable on a debt security, expressed as a percentage of the face value of the instrument.

Current Yield: The ratio of interest to the actual market price of the bond expressed as a percentage: annual interest/ current market value = current yield.

Custodian: The organisation that keeps and safeguards the custody of fund's securities and other assets.

Cut off Time: In respect of all mutual funds regulated by SEBI, fresh subscriptions and redemptions are processed at a particular NAV. Every fund specifies a cut-off time in respect of fresh subscriptions and redemption of units. All requests received before the cut-off times are processed at that day's NAV and thereafter at the next day's NAV.

Debt /Income Funds: Funds that invest in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers. These funds are the least risky and are generally preferred by risk-averse investors.

Discount: When the market price of a listed scheme is less than the actual NAV of the units, then it is said to be trading at a discount.

Diversification: Mutual funds spread investments among a number of different securities to reduce the risk inherent in investing.

Dividend: Mutual fund dividends are paid out of income from the scheme's investments and can be announced out of the realised gains only.

Dividend Distribution Tax: A tax payable by a debt oriented mutual fund before dividend is distributed to the unit holders. There is no such tax applicable on equity oriented schemes.

Dividend Frequency: The time period of dividend payout of a scheme. This is especially valid in the case of an income/debt schemes like monthly income plans that normally have a regularity in such distributions.

Dividend History: The track record of dividends declared by a fund till date.

Dividend Per Unit: Total amount of dividend declared by a fund for a scheme divided by total number of units issued to all the investors.

Dividend Plan: In a dividend plan, the fund distributes its accumulated income from time to time as and when the dividend is declared.

Dividend Reinvestment: In a dividend reinvestment plan, the dividend is reinvested in the scheme itself and is not paid out to the investors. i.e. instead of receiving dividend in cash, the unit holders receive units allotted to them at the Ex-dividend NAV.

Dividend Warrant: It is an instrument issued by companies/ mutual funds to an investor for the purpose of payment of dividends.

Dividend Yield: It refers to the dividend earned per unit of a scheme at the prevailing per unit price.

Entry Load: It is the load charged by the fund when one invests into the fund. It increases the price of the units to more than the NAV and is expressed as a percentage of NAV.

Equity Schemes: In these schemes more than 65% of the investments are invested in equity shares of various companies.

Ex-Dividend Date: It is the effective date of a dividend distribution. When the dividend is paid, the NAV of the fund drops by the amount of the dividend.

Ex-Dividend NAV: The NAV declared post record date is the ex-dividend NAV.

Exit Load: It is the load charged by the fund when one redeems the units from the fund. It reduces the price of the units to less than the NAV and is expressed as a percentage of NAV.

Expense Ratio: The Expenses of a mutual fund include management fees and all the fees associated with the fund's daily operations. Expense Ratio refers to the annual percentage of fund's assets that is paid out in expenses.

Face Value: The original issue price of one unit of a scheme

Floating Rate Funds: These are funds which invest in short to medium term interest bearing instruments issued by financial intermediaries and corporates. These bonds carry variable interest rates and adjustments to the interest rate are usually made every six months. Generally, the interest rates on these bonds are tied to a money-market index such as MIBOR, the most commonly used index

Fund Category: Classification of a scheme depending on the type of assets in which the mutual fund company invests the corpus. It could be a growth, debt, balanced, gilt or liquid scheme

Fund Family: All the schemes, which are managed by one mutual fund.

Fund Management Costs: The charge levied by an AMC on a mutual fund for managing their funds.

Fund Manager: Appointed by the AMC, he is the person who makes all the final decisions regarding investments of a scheme.

Gilt funds: These funds invest exclusively in government securities of different maturities. The credit risk is virtually absent and there are no chances of government defaulting on its payment obligations. This effectively reduces the yield on them.

Gilts/Government Securities: Securities created and issued by the central government and/or a state government, and may include securities unconditionally guaranteed by the Government

Global Funds: Mutual funds that invest in stocks of companies from all over the world.

Income / Debt Funds: They are mutual funds that invest primarily in fixed income securities and aim to provide reasonable returns with low degree of risk.

Index Funds: A type of mutual fund in which the portfolios are constructed to mirror a specific market index. Index funds are expected to provide a rate of return over time that will approximate or match that of the market which they are mirroring.

Indexation: The central government specifies an index called as cost inflation index, linked to the wholesale price index. The indices of two years (year of purchase and the year of sale) are used for the purpose of computing capital gains tax. The purchase price is multiplied by the index of the year of sale and the product is divided by the index of the year of purchase. This benefit is available only if the security has been held for more than 12 months. On sale of debt-oriented fund schemes, one can opt for paying tax at the rate of a flat 10% or go in for paying 20% after taking the benefit of indexation.

Inflation: Defined as the fall in the value of a currency, it results in the rise in prices of goods and services over a period of time.

Investment objective: The declared purpose of investment of a mutual fund scheme

Launch Date: The date on which a scheme is first made open to the public for subscription

Liquid Funds /Money Market Funds: These funds invest only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit. The objective is to provide liquidity and preserve the capital. Due to the low degree of risk, they generally provide lower returns than other avenues.

Liquidity: The cash and cash equivalent assets available with a fund to meet expenses and immediate redemption requirements of the investors. It refers to the ability to buy or sell an asset quickly or the ability to convert to cash quickly.

Load: A charge that may be levied as a percentage of NAV at the time of entry into the Schemes or at the time of exiting from the schemes.

Lock In Period: The period after investment in fresh units during which the investor cannot redeem the units. It is normally a key feature of Tax schemes.

Management Fee/Expense: The charge made to a mutual fund for providing investment and advisory services, usually expressed as percentage of assets.

Market Risk: It refers to the risk posed by the market in itself i.e. the risk that the price of a security will rise or fall due to changing economic, political, or market conditions, or due to a company's individual situation.

Maturity Date: The date upon which the principal of a security becomes due and payable to the security holder.

Minimum Additional Investment: The minimum amount, which an existing investor should invest for purchasing fresh units.

Minimum Balance: It is the minimum amount specified by a fund that should remain invested in a scheme after any redemption.

Minimum Subscription: It refers to the minimum amount required to be invested to purchase units of a scheme of a mutual fund.

Minimum Withdrawal: The smallest sum that an investor can withdraw (get redeemed) from the fund at one time.

Money Market: It refers to a market for very short-term securities. Money market instruments are forms of debt that mature in less than a year and are very liquid in nature. Securities such as Treasury Bills and Call Money make up the bulk of trading in the money markets.

Money Market Instruments: Refers to Commercial Papers, Treasury Bills, GOI Securities etc. with an unexpired maturity less than or up to one year, Call Money, Certificates of Deposit and any other instrument specified by the Reserve Bank of India.

Mutual Funds: An investment company that pools money from its unitholders and invests that money into a variety of securities, including stocks, bonds, and money-market instruments. This represents a way of investing money into a professionally managed and diversified pool of securities.

Net asset value (NAV): The value of fund's portfolio at market value less current liabilities divided by the number of units outstanding. Net asset value is normally computed daily or weekly and can be found in the financial section of the daily newspaper.

Nifty: An index of prices of a group of fifty stocks listed on the NSE.

Nominee: The person(s) to whom the assets should be distributed upon the death of the account holder.

Non Performing Investments: Part of the portfolio investment of a debt fund which is not making interest payment or principal amount repayments in time.

Offer Document: It is the official document issued by mutual funds prior to the launch of a fund describing the characteristics of the proposed fund to all its prospective investors. It contains information required by SEBI pertaining to issues such as investment objective and policies, services, and fees.

Offering Period: The period during which the initial offer to subscribe for the units of a scheme is open.

Offshore Funds: The funds set up abroad to channelise foreign investments in the Indian capital markets.

Open-End Scheme: Scheme of a mutual fund where purchase or sale of units is allowed on a continued basis.

Opening NAV: The NAV disclosed by the fund for the first time after the closure of an NFO.

Opportunity Risk: The risk that a better opportunity may present itself after you have already committed your money elsewhere.

Payout: Pay-out day is the designated day on which securities and funds are paid out to the members by the clearing house of the Exchange.

Performance: Performance of an investment indicates the returns from an investment. The returns can come by way of income distributions as well as appreciation in the value of the investment.

Portfolio: It refers to the total investment holdings of the fund.

Portfolio Churning: It refers to the changes made to the portfolio keeping in view the market conditions. It includes both buying and selling of holdings and is aimed at giving a better yield to the investor.

Portfolio Turnover Cost: It refers to the costs associated with the churning (or changes made to the holdings) of the portfolio. Portfolio changes have associated costs of brokerage, custody fees, transaction fees and registration fees, which lower the returns. The quantum of turnover depends on the management style of the fund manager.

Premium: When the market price of a unit is more than the NAV, it is said to be trading at a premium.

Prospectus: An offer document by which a mutual fund invites the public for subscribing to the units of a scheme. This document contains information about the scheme and the AMC so as to enable a prospective investor to make an informed decision.

Public Sector Undertakings (PSU) Bonds: PSU Bonds are medium and long term obligations issued by public sector companies where the government share-holding is generally greater than 51% or more. Some of the PSU bonds carry tax exemptions also.

Purchase Price or Offering Price: The price at which a mutual fund's units can be purchased. The asked or offering price means the current net asset value per unit plus sales charge, if any.

Rating: The rating is a symbolic indicator of the current opinion of the relative capability and timely servicing of debts and obligations. Ratings are based on an objective analysis of the information. The rating could be done in respect of the creditworthiness of debt instruments, risk of loss in an investment or the performance of an investment.

Record Date: The date by which mutual fund holders are registered as unit owners to receive any future dividend or capital gains distribution.

Recurring Investment Facility: An arrangement provided by the fund management whereby regular purchases of small or large numbers of units may be allowed. The plan sometimes also provides for automatic reinvestment of income dividends and capital gains distribution.

Recurring Withdrawal Facility: The arrangement that the fund provides; whereby unitholders can receive periodic payments in a specified amount. These amounts may be more or less than the income of the fund.

Redemption fee: A kind of sales charge, also referred to as a back-end load, imposed when an investor redeems, or sells back units of the fund.

Redemption of units: Buying back/cancellation of the units by a fund on an on-going basis or on maturity of a scheme. The investor is paid a consideration linked to the NAV of the scheme.

Redemption Price: The price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Registrar or Transfer Agent: The institution that maintains a registry of unitholders of a fund and their unit ownership. Normally the registrar also distributes dividends and provides periodic statements to unitholders.

Repurchase: Buying back/ cancellation of the units by a fund on an ongoing basis or for a specified period or on maturity of a scheme. The investor is paid a consideration linked to the NAV of the scheme

Repurchase Date /Period: In the case of close-ended schemes, the specified date on which or period during which the investor can redeem units held by him in the scheme before the maturity of the scheme.

Repurchase price: The price of a unit (net of exit load) that the fund offers the investor to redeem his investment.

Risk Adjusted Returns: The expected returns from an investment depend upon the risk involved in the investment. For the purpose of comparing returns from investments involving varying levels of risk, the returns are adjusted for the level of risk before comparison. Such returns (reduced for the level of risk involved) are called risk-adjusted returns.

Risk-Free: Absence of credit risk in a security. Usually Government or Government guaranteed securities are only considered to be risk free.

Repatriate: The act of legally returning to the country of origin. Often used in connection with currency conversion, when foreign currency is brought into the home country and converted to the local currency.

Sale price: The price at which a fund offers to sell one unit of its scheme to investors. This NAV is grossed up with the entry load applicable, if any.

Sector Allocation: It refers to the portion of assets of a fund which is invested in a particular well-defined segment of the economy, like Information Technology, pharmaceuticals, utilities, media, telecommunications, etc.

Sector Funds: Sector Funds are mutual funds that are established to focus and invest in the stocks of specific sectors of the economy, such as pharmaceuticals, chemicals, or information technology. This is normally specified in the offer document of the funds.

Security: Generally, an instrument evidencing debt of or equity in a corporation in which a person invests. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidences of indebtedness or ownership.

Sponsor: A sponsor is the person who, acting alone or in combination with another body or corporate, establishes a mutual fund and applies to SEBI for its registration. The sponsor is also closely associated with the AMC. According to SEBI regulations, the sponsor has to contribute a minimum of 40% of the net worth of the AMC.

Systematic Investment Plan (SIP): A program that allows an investor to provide post-dated cheques to the mutual fund to allot fresh units at specified intervals (usually monthly or quarterly). On the specified dates, the cheques are realized by the mutual fund and additional units at the prevailing NAV are allotted to the investor. This enables him to invest as little as Rs. 1,000 a month and take advantage of rupee cost averaging.

Systematic Transfer Plan (STP): A plan that allows the investor to give a mandate to the fund to periodically and systematically transfer a certain amount from one scheme to another.

Systematic Withdrawal Plan (SWP): A plan offered with some schemes under which post-dated cheques for fixed amounts (as may be fixed by the fund) are issued to the investors for monthly, bi-monthly or quarterly withdrawals. The withdrawals are as per the requirements of the investor specified by him/ her at the time of investment.

Total Assets Under Management: The market value of the total investments of a fund as on a particular date.

Total Return: Return on an investment, taking into account capital appreciation, dividends or interest, and individual tax considerations adjusted for present value and expressed on an annualised basis.

Trust: A legal arrangement under which property and assets may be held and managed for the benefit of another person. Mutual funds in India are registered under the Trusts Act.

Trustee: A person or a group of persons having an overall supervisory authority over the fund managers. They ensure that the managers keep to the trust deed that the unit prices are calculated correctly and the assets of the funds are held safely.

Unit: A Unit represents one undivided share in the assets of the Schemes.

Unit Trust: A special type of fund, usually a bond fund, that has a fixed portfolio, shares or "units" are sold when the fund is formed, and the portfolio remains fixed until the maturity of the underlying securities.

Unitholder: A person who holds Unit(s) under a Mutual Fund.

Yield: Distributions from investment income, usually expressed as a percentage of net asset value or market price. Unlike total return, yield is a single component of investment income and does not include capital gains distributions or capital appreciation of underlying shares.

Yield Curve: The Yield Curve gives the relationship at a given point in time between yields on a group of fixed-income securities with varying maturities viz. treasury bills, notes, and bonds. The curve typically slopes upward since longer maturities normally have higher yields, although it can be flat or even inverted.

Yield To Maturity: Used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments.

Zero-Coupon Bond: A bond where no periodic interest payments are made. The investor purchases the bond at a discounted price and receives one payment at maturity. The maturity value an investor receives is equal to the principal invested plus interest earned compounded semi-annually at the original rate to maturity. Interest income from zero-coupon bonds is subject to taxes annually even though no payments will be made.



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