Glossary on mutual funds

GLOSSARY ON MUTUAL FUNDS

Glossary on Mutual Funds:

Account Statement
A physical document, similar to a bank account statement, representing the mutual fund units
owned. Issued to the unit holder every time he/she carries out a transaction.

Annual Report
Unabridged financial results that comprise historical per unit statistics and complete portfolio of
schemes of a mutual fund for a certain period. It is sent to unit holders once in a year.

Appreciation
An increase in an investment’s value.

Asset Allocation
The process of diversifying investments among different types of assets like stocks, bonds and
cash in order to optimize risk / return tradeoff based on a person’s financial situation and goals.

Asset Class
Different types of investments such as stocks, bonds, real estate and cash.

Asset Management Company
A firm that invests the pooled funds of retail investors in securities in line with the stated
investment objectives. For a fee, the investment company provides more diversification,
liquidity, and professional management service than is normally available to individual investors.

Asset-Backed Security
A debt instrument backed by loan paper or accounts receivable from banks, companies or other
providers of credit.

Assets
An item of value owned by an individual or an organization. It could be stocks, cash, house or a
car.

Automatic Investment Plan
Periodic investment of a fixed amount by a unitholder, either directly from his bank account or
by issuing post-dated cheques, in his mutual fund account. It allows the investor to benefit from
rupee cost averaging.

Automatic Withdrawal Plan
Allows an investor to receive periodic payments of fixed amount or units from his investment in
a mutual fund scheme. Retirees who want a regular income supplement often choose this.

Average Portfolio Maturity
The average maturity of all the bonds in a bond fund’s portfolio.

Babasabpatilfreepptmba.com Page 1


Back-End/ Redemption Load
One of two possible sales charge imposed by funds that charge fees. Redemption load is a charge
an investor pays when units are redeemed or sold back to the fund. It sometimes depends on how
long the investment is held -- generally the longer the time period, the smaller the charge.

Balanced Scheme
A mutual fund scheme with an investment objective of both long-term growth and Income,
through investment in stocks and bonds. Typically, the stock-bond ratio ranges around 60%-40%
in an effort to obtain the highest returns consistent with a low risk strategy.

Basis Point (BP)
The smallest measure used in quoting yields on fixed income securities. One basis point is one
percent of one percent, or 0.01%.

Bear Market
A prolonged period of falling securities prices in a stock market.

Benchmark
A standard used for comparison. Usually to provide a point of reference for evaluating a fund's
performance. The common benchmarks for equity-oriented funds is the BSE 200 index or the
BSE Sensex.

Beta

A measure of a fund’s volatility in relation to the stock market, as measured by a stated index.
By definition, the beta of the stated index is 1; a fund with a higher beta has been more volatile
than the market, and a fund with a lower beta has been less volatile than the market. Based on
past historical records, a beta higher than 1.0 indicates that when the market rises, the stock will
rise to a greater extent than that of the market; likewise, when the market falls, the stock will fall
to a greater extent. A beta lower than 1.0 indicates that the stock will usually change to a lesser
extent than that of the market. The higher the beta, the greater the investment risk.

Blue chip

Stock of a nationally known company that has a long record of profit, growth, and dividend
payment, and a reputation for quality management, products, and services.

Bond
A debt security, or an IOU, issued by a company or government agency. A bond investor lends
money to the issuer and, in exchange, the issuer promises to repay the loan amount on a specified
maturity date; the issuer usually pays the bondholder periodic interest payments over the period
of the loan.

Bond Scheme

A scheme that invests primarily in bonds with the general emphasis on income over growth.



Bottom-Up
An investment strategy that first seeks individual companies with attractive investment potential,
then considers the economic and industry trends affecting those companies.

Bull Market
A prolonged rise in the price of stocks, bonds or commodities characterized by high trading
volumes.

Business Day

A Business Day is any day other than a Saturday, a Sunday or a day on which banks are not
required or obligated by law or executive order to remain closed including the occasions when
the functioning of the Banks/ RBI is affected due to a strike call made by a Recognized Union/
Management at any part of the country.

Call money

Money which is loaned in the call market, which can be demanded for repayment on call, which
basically means immediately. The term call money is also known as money at short notice as it is
repayable in 24 hours. It is also traded in the money market.

Call Risk
The risk that bonds will be redeemed (or "called") before maturity. This possibility increases
during periods of falling interest rates.

Capital Appreciation
An increase in the value of an investment, measured by the increase in a fund unit's value from
the time of purchase to the time of redemption.

Capital Gain
The amount by which an investment’s selling price exceeds its purchase price.

Capital Market
A market where debt or equity securities are traded.

Certificate of Deposit (CD)

Short-term debt instrument issued by scheduled commercial banks excluding regional rural
banks. They are unsecured instruments that mature between three months to one year.

Compounded Annualized Growth Return (CAGR)

When you deposit money in a bank it earns interest. When that interest also begins to earn
interest the result is compound interest. Compounding occurs if bond income or dividends from
stocks or mutual funds are reinvested. Because of compounding the money has potential to grow
much faster.



Contingent Deferred Sales Charge (CDSC)
A type of back-end sales load charged when shares are redeemed within a specific period
following their purchase. Usually assessed on a sliding scale, these charges reduce, the longer the
units are held.

Closed-End Scheme
A mutual fund scheme that offers a limited number of units which have a lock-in period, usually
of three to five years. ELSS schemes are closed-ended schemes. The units of closed-end funds
are often listed on one of the major stock exchanges and traded like securities at prices which
may be higher or lower than its net asset value

Commercial Paper
Debt instruments issued by corporations to meet their short-term financing needs. Such
instruments are unsecured and have maturities ranging from 15 to 365 days.

Commission
A fee charged by a broker or distributor for his/her service in facilitating a transaction.

Compound Interest
Interest earned not only on the initially invested principal but also on accumulated interest during
the period.

Consumer Price Index

The index compiled by a governmental agency which follows the cost of living by following the
changes in price of basic goods and services over time. This index measures inflation.

Convertible security

Corporate security (usually preferred stock or bond) that is exchangeable for another form of
security (usually common stock) at a predetermined price.

Coupon
Interest rate on a debt security that the issuer promises to pay to the holder until maturity.
Usually expressed as a percentage of the face value of the security.

Credit Rating
A measure of a bond issuer's creditworthiness or the ability to repay the loan as rated by an
independent rating agency, such as CRISIL, ICRA and CARE.



Credit Risk
The possibility that a bond issuer will default, and fail to repay principal or interest as promised.
Also known as "default risk."

Cumulative Quantitative Discount (CQD)
Cumulative quantitative discount (CQD) is discount on sales load to investors on increasing
purchase of units.

Cumulative total return

Usually calculated in the same manner as standardised average annual total return, except that
these figures represent the total change in value of an investment over the stated periods and do
not reflect any sales charges

Current assets

Assets that can be converted to cash within a year.

Current liabilities

Liabilities that must be paid within a year.

Currency Risk
The possibility that fluctuating currency exchange rates will affect the rupee value of an
investment.

Custodian
The organization (usually a bank) that keeps and safeguards the custody of securities and other
assets of a fund.

Cyclical stocks

Stocks which rise and fall in price with the state of the economy, in such industries as
construction, automobile, engineering or those affected by the international economy such as
shipping, aviation, and tourism. Cyclical stocks are also stocks which are affected by the natural
environment such as fertilizers and tea. Examples of non-cyclical stocks would be drugs,
insurance, basic foodstuffs and many other consumer products.

Debentures

Instruments of debt, usually unsecured. They are also usually credit rated.

Debt funds/ securities



A general term for any security representing money loaned that must be repaid to the lender at a
future date. Bonds,T-notes, T-bills and money market instruments are debt securities, but they
vary in maturities.

Default

A term that denotes the failure to pay the principal or interest on a financial obligation (such as a
bond).

Derivative

Financial instrument whose value is based on the value of another underlying security.

Depreciation
A decline in an investment's value.

Discount

Refers to the selling price of a bond when it’s price is below its maturity value.

Distribution
The payment of dividends to unit holders by a mutual fund.

Diversification
The strategy of spreading investments among different securities to reduce risk. By nature,
mutual funds are a diversified investment.

Dividend
When companies pay part of their profits to the shareholders those profits are called dividends. A
mutual fund’s dividend is money paid to shareholders from investment income the fund has
earned. The amount of each share’s dividend depends on how well the company does.

Dividend Reinvestment
A unitholder service that allows dividend distributions to be reinvested automatically to purchase
more fund units.

Dow Jones Industrial Average

The oldest and most quoted measure of stock market price movements, an indicator showing
how the market is going. It is a price-weighted average of 30 actively traded blue chip stocks.

Earnings (per share)



The net income for a company during a specific period. It is calculated by subtracting the cost of
sales, operating expenses and taxes from revenues, for a specific time period. It is the reason
corporations exist and often the single most important determinant of a stock’s price.

Equity Schemes
A scheme that invests primarily in stocks while seeking to provide relatively high long-term
growth of capital.

Ex-Dividend Date
The date following the record date for a scheme. When a fund's net asset value reduces by an
amount equal to a dividend distribution.

Expense Ratio
A fund's operating expenses, expressed as a percentage of its average net assets.

Face value

The value printed on the face of a stock, bond or other financial instrument or document.

Family Of Schemes
A set of schemes with different investment objectives from a single asset management company
usually allowing investors to switch

their investments from one scheme to another at a no charge or a nominal charge.

FCNR

A Fully Convertible Non-Rupee account that can be opened for funds coming in from abroad or
from local funds. The funds in the account are held in a foreign currency.

Fixed assets

A long-term asset that will not be converted to cash within a year such as a house or a plot of
land.

Fixed deposit

An investment instrument where you invest a fixed amount of money for a fixed period of time
at a fixed rate of interest.

Fixed Income Security
A security that pays a fixed rate of interest such as a bond but do not offer an investor much
potential for growth.

Front-End Load
A one-time charge that an investor pays at the time of buying units of a scheme.



Fixed rate

A loan in which the interest rates do not change during the entire term of the loan.

Floating rate

An interest rate which is periodically adjusted, usually based on a standard market rate outside
the control of the institution. These rates often have a specified floor and ceiling, which limit the
floating rate. The opposite of having a floating rate is having a fixed rate.

Floor

A lower limit for a price, interest rate, or other numerical factor. The price at which a stop order
is activated (an order to buy or sell at the market when a definite price is reached either above
(for a buy) or below (for a sell) the price that prevailed when the order was given). Also the area
of a stock exchange where active trading occurs.

Fully Invested
The investment of nearly all available assets in securities as per the stated objective of the
scheme and having no cash or cash equivalents in one’s portfolio.

Fund Manager
The individual responsible for making portfolio decisions for a mutual fund.

Government securities

Securities that are sold to the public by the government, for example, bonds.

Growth
An investment objective of equity funds which seek to provide capital gains, rather than dividend
income.

Growth funds

Mutual funds with a primary investment objective of long-term growth of capital. Unlike
income, which is somewhat regular and consistent in most cases, growth is much less certain.
Growth investments, however, usually outpace the returns on income investments over the long-
term (five to ten years, or longer). It invests mainly in common stocks with significant growth
potential.

Growth Investing
An investment style that seeks stocks with the belief they will go up in price, regardless of the
stock's current price relative to its underlying value. Often discussed in contrast to value
investing

Holdings



The possessions or securities in an investors portfolio.

Historical Yield
Yield provided by a scheme, typically a money market fund, over a specific time period.

Inception Date
The date when a scheme’s initial offering period ends and the scheme’s formation takes place.

Income /Debt Scheme
A scheme that invests primarily in fixed income securities. Typically, income schemes seek to
provide current income rather than growth of capital.

Index
A benchmark against which the performance of a scheme is measured. Usually, equity funds use
BSE 30 or BSE 200 as the benchmark. For fixed-income funds it is a bond index. The
benchmark index must consist of securities similar to which the scheme invests in.

Index Fund
A fund that tries to mirror the performance of an index by investing in securities making up that
index. (note: it is not possible for investors to actually invest in the actual index, such as the BSE
30).

Inflation Risk
The possibility that the value of assets or income will be eroded by inflation affecting the
purchasing power of a currency. Often mentioned in relation to fixed income funds as while they
may minimize the possibility of losing principal, they expose an investor to inflation risk.

Initial Public Offer (IPO)
The first sale of units of a scheme by a mutual fund to the public. Usually, for a fixed time
period.

Interest rate risk

The risk that a security’s value will change due to an increase or decrease in interest rates. A
bond’s price will always drop as interest rates rise and when interest rates fall, a bond’s price will
rise.

Investment Grade
High quality bonds that are rated AAA or higher by a rating agency. Investment grade bonds are
considered safe. However, the higher the bond's rating, the lower the interest it offers.

Investment Objective
A scheme’s investment goal. Say, a growth scheme typically has an investment objective of
providing long-term growth of capital.



Load
A one-time sales charge paid by an investor while buying or selling units of a scheme. Typically,
there are two types of loads front-end charged at the time of purchase and back-end charged at
the time of redemption.

Liabilities

The claims of investors who have loaned to a company. The debts of a company.

Liquidity
The ease with which an investment can be converted into cash or cash equivalents. Mutual fund
units are generally considered highly liquid investments as they can be sold on any business day
at their current net asset value

Listed

Securities which are traded and listed in any of the approved Stock Exchanges of India will be
treated as listed security.

Lock-in period

A period of time during which the investor is restricted from selling a particular investment.

Management Fee
The amount a scheme pays to its asset management company for its services. Typically, a certain
percentage of assets under management. A fund's management fee is listed in its offer document.

Market risk

The potential loss that is possible as a result of short-term volatility of the stock market,
indicated by beta. Owning mutual fund shields an investor to some market risk that a stockholder
may be vulnerable to because of their diversification.

Market Timing
Attempting to time the purchase and sale of securities or mutual fund units to coincide with
market conditions.

Maturity Date
The date on which the principal amount of a bond is to be paid in full.

Maturity value

The amount the issuer agrees to pay out when the bond reaches it’s maturity date.

Minimum Purchase
The smallest investment amount a scheme will accept to open a new unitholder account.



Money Market Fund
A fund that invests in the short-term, high-grade securities sold in the money market including
government securities, treasury bills, certificates of deposit, and commercial paper.

Mutual Fund
An investment company through which an investor can pool his money with other investors who
have a similar objective. Professional investment managers, then invest the pool in securities
which in their judgement will help investors achieve their objective. Mutual funds offer the
benefits of portfolio diversification (which provides greater safety and reduced volatility),
professional management, liquidity and convenience.

Net Asset Value (NAV)
The market value of a mutual fund unit. It is calculated daily by taking the funds total assets,
securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the
number of units outstanding.

Net Assets
The net worth of a fund.

Net profit margin

A measure of a company’s profitability and efficiency calculated by dividing a measure of net
profits (operating profit minus depreciation and income taxes) by sales.

Net worth

The value found by subtracting total liabilities from total assets.

No Load Fund
A fund that sells its units to investors without a sales load/charge.

NRE

A Non-Resident External Rupee account that NRIs can open with any Indian bank. They can use
this account for making investments in India on a repatriable basis.

NRI

A Non-Resident Indian who is an Indian citizen or a person of Indian origin but who resides
abroad. NRIs have to follow specific rules when investing in India.

NRO

An Ordinary Non-Resident Rupee account which can be opened for funds coming in from
abroad or from local funds. The amount in the account is, however, non-repatriable.



Offer Document / Prospectus
A legal document, that describes a mutual fund scheme. It contains information required by the
Securities and Exchange Board of India explaining the offer, including the terms, issuer,
objectives, historical financial statements, and other information that could help an individual
decide whether the investment is appropriate for him.

Offering price

The price at which mutual fund shares are offered for sale to the public. Also known as offering
price. The public offering price represents the net asset value plus any applicable initial sales
charges.

Open-Ended Scheme
A scheme where investors can buy and redeem their units on any business day. Its units are not
listed on any stock exchange but are bought from and sold to the mutual fund.

Operating Expenses
The day-today costs a mutual fund incurs in conducting business, such as for maintaining offices,
staff, and equipment. These expenses are paid from the fund's assets before any earnings are
distributed.

Performance
A measure of how well a fund is doing. Typically, mutual fund performance measures are yield
(for dividends) and total return (which measures dividends plus changes in net asset value).
Increase in the Net Asset Value (NAV)

Portfolio
A collection of securities owned by a mutual fund. A fund's portfolio may include a combination
of stocks, bonds, and money market securities.

Portfolio Manager
The individual responsible for managing a mutual fund's portfolio.

Portfolio Turnover
The rate of trading activity in a fund's portfolio of investments. In other words, how often
securities are bought and sold.

Preferred stock

A type of capital stock whose holders are paid dividends at a specified rate. It has preference
over common stock in the payment of dividends and the liquidation of assets, but does not
ordinarily carry voting rights. The benefits of owning preferred stock are realised if the company
ever goes bankrupt. If this occurs, preferred stock shareholders receive their money first. General
(also known as common) stockholders may not receive any money, if none is remaining after
paying preferred stock holders.



Price-earnings ratio (P/E)

One of the benchmarks used by portfolio managers to help them value companies. It is calculated
by dividing a company’s share price by its earning per share.

Principal
The original amount initially invested, exclusive of earnings.

Promissory note

A document signed by the borrower in which he promises to repay a loan under agreed-upon
terms.

Public Offer Price
The price at which an investor can buy units of a mutual fund scheme. It includes the current net
asset value plus any sales load.

Rate of return

Rate of return is calculated by subtracting the purchase value by the present value and then
dividing it by the purchase value. For equities, we often include dividends with the present value.

Real Return
The rate return earned on an investment after adjusting for the rate of inflation.

Record Date
The date on which a unitholder must officially own a scheme's units in order to receive declared
dividend.

Redeem
To cash in units by selling them back to the mutual fund.

Redemption Price
The price at which a mutual fund’s units are redeemed, or bought back, by the fund. It is usually
the current net asset value per unit less exit load if any.

Reinstatement Privilege
A facility which allows unit holders who have redeemed units, and then wish to reinvest, to
reinvest without paying the sales load. There is generally a 30-day time limit for this service.

Repatriable



The return from abroad of the financial assets of an organization or individual, and the
conversion of foreign currency to Rupees.

Risk

In general, risk is the possibility of suffering loss. There are many types of risk, such as credit
risk , principal risk, inflation risk, interest rate risk and investment risk. If you are prepared to
accept greater risk, you have the chance of earning higher returns or profits on your money.
Low-risk investments, while generally safer, do not usually produce a high return, hence the loss
of potential gain.

Risk/ reward trade-off

The compromise made between high- and low-risk investments. High-risk investments generally
generate more earnings, while low-risk ones generate a lower rate of return.

Risk tolerance

The willingness of an investor to tolerate the risk of losing money for the potential to make
money.

Rollover
A movement of funds from one investment to another, often similar, investment. Typically used
when securities are maturing.

Rupee Cost Averaging
An investment strategy that involves investing a fixed amount in a scheme at regular intervals -
say, monthly or quarterly. As a result, more fund units are bought when prices are low than at
high prices, usually bringing down an investor's average cost per share over time.

Sales charge

A charge added on to the price of a mutual fund when you buy it.

Sector Fund
A fund that invests primarily in securities of companies engaged in a specific industry. Sector
funds entail more risk, but may offer greater potential returns than funds that diversify their
portfolios.

Securities

The holdings of a mutual fund, such as stocks or bonds. Stocks are securities representing
ownership shares. Bonds are securities representing a contractual debt obligation of the issuer to
repay the holder, with interest.



Settlement Date
The date by which a transaction must be settled, that is, to make the payment of funds and the
delivery of securities.

Standard Deviation
A measure of the degree to which a fund's return varies from the average of the scheme’s own
return.

Stock Fund
A fund that invests primarily in stocks.

Switching
The movement of investment from one scheme to another usually within the family of schemes.
An investor may switch schemes because of market conditions.

Systematic Investment Plan (SIP)

Allows an investor to periodically invest in units by issuing post-dated cheques. It allows the
investor to benefit from rupee cost averaging.

Systematic Withdrawal Plan (SWP)

Permits the investor to receive regular payments of a fixed amount or capital appreciation from
his investment in a mutual fund scheme on a periodic basis. Retirees in need of a regular income
often opt for this.

Top Down
An investment method that first defines major economic and industry trends, and then identifies
specific companies that are likely to benefit from those trends.

Total Return
A fund's performance that takes into account: income from dividends and unit price
appreciation/depreciation over a time period.

Treasury bills (T-bills)

A short-term security with a maturity of one year or less.

Treasury bonds (T-bonds)

A long-term debt instruments with a maturity of 10 years or longer.

Treasury notes (T-notes)

A certificate representing an intermediate-term loan to the government with a maturity between
two to ten years.



Transaction costs

The costs incurred by the buying and selling of securities, including broker commissions and the
difference between dealer buying and selling price.

Transfer
The process of changing ownership of a unitholder account within the same scheme.

Transfer Agent
A firm employed by a mutual fund to maintain unitholder records, including purchases, sales,
and account balances.

Treasury Bill (T-bill)
A debt security issued by the Indian government, having a maturity of less than a year.

Turnover Rate
Based on the corpus, it is the number of times at which the fund buys and sells securities each
year.

Unitholder
An investor, owning units of a mutual fund.

Unlisted

Securities which are not traded or listed in any of the approved Stock Exchanges of India will be
treated as unlisted security.

Unrealized Gain Or Loss
Increase or decrease in the prices of securities held by the fund.

Value Investing
The investment approach which favours buying under priced stocks that have the potential to
perform well and increase in price.

Volatility
The rate by which the price of a security fluctuates in changing market conditions.

Year To Date (YTD)
A period in a calendar year starting January 1 of that year and ending on that date.

Yield
The annual rate of return on an investment usually expressed as a percentage.

Yield Curve
A graph depicting yield vis-a-vis maturity. If short-term rates are lower than long-term rates, it is



a positive yield curve, if short-term rates are higher, it is a negative or inverted yield curve. If
there is isn’t much difference, it is a flat yield curve.

Yield To Maturity (YTM)
The yield earned by a bond if held to maturity

Zero Coupon Bond
A bond issued at a discount, which accrues interest that is paid in full 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


Glossary on mutual funds

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Glossary on mutual funds

Similar to Glossary on mutual funds (20)

More from Babasab Patil

More from Babasab Patil (20)

Recently uploaded

Recently uploaded (20)

Glossary on mutual funds