Mutual Fund Dictionary

A

Account Statement

A document issued by a Mutual Fund house,
indicating details of the transactions and the mutual fund units held by the
investor. It is usually issued in lieu of a unit certificate(clickable).

Adviser

An individual/organization recognised and
authorized by a certifying agency in India to give professional advice on
investment and financial planning. Normally, an adviser may charge hid clients
separate fees for his services.

Annual Report

A report that the mutual fund house sends to its
shareholders , containing the fund’s audited financial statements
(Balancesheet, P&L) and performance over the last fiscal year. The annual
report also has fund’s portfolio holding as on the last business day of the
fiscal year.

Annualised Return

The return
that an asset achieves over a period of one year. It is ideally used for
comparison purposes.

Appreciation

An increase in the investment value is called appreciation. For example, when
the Net Asset Value of an mutual fund scheme increases from Rs. 20 to Rs. 25,
it is said to have appreciated by Rs. 5.

Asset

Stocks/securities, cash and receivables owned by a fund.

Asset Allocation

An investment strategy that distributes the money held by the mutual fund
across various asset classes, based on a fund’s investment objective as stated
in the offer document.

Asset Management Company

A company/firm that pools funds from investors and undertakes the
responsibility of investing the funds across various asset classes with stated
objectives.

Average Maturity

For mutual fund schemes that invest in debt securities, the average amount of
time until the debt security matures is called average maturity. Changes in
interest rates impact those funds with longer average maturity.

Association of Mutual Funds of India (AMF)

An association dedicated to developing the Indian Mutual Fund Industry on
professional, healthy and ethical lines and to enhance and maintain standards
in all areas with a view to protecting and promoting the interests of mutual
funds and their interest holders.

AUM

The market value of assets that an investment management company manages on
behalf of investors.

B

Balanced Funds

A Mutual Fund category that invests in equity and debt instruments, in varying
proportions, in order to incorporate the features of both classes – safety of
fixed income securities and the growth potential of equity.

Balance Sheet

A financial statement that shows the standing of a company's assets and
liabilities, as on the fiscal year.

Basis Point

One basis point denotes one-hundredth of a percentage (1/100 i.e. 0.01)

Bear Market

A period in the stock market wherein stock prices are falling is termed as a
Bear market.

Benchmark

A standard against which a fund’s performance is compared and evaluated. Some
of the common benchmarks are S&P BSE Sensex and Nifty 50.

Blue Chip Stock

The stock of a company that is large in size, showcases a good track record and
is ranked amongst the top in the stock market is termed as a Blue chip stock
and the company is termed as a Blue Chip company.

Bond

A debt instrument that carries a fixed or variable interest rate and is issued
either by a corporate or the government, is called a Bond.

Bonus

Bonus is additional units allotted to investors basis their existing holdings,
thereby splitting their existing units and leading to a reduction in NAV per
unit.

Broker

A licensed person who is authorized to deal in stocks, bonds or mutual funds
and receive commissions for the services provided.

Brokerage

The fee paid to a broker for the services provided with respect to dealing in
stocks, bonds and mutual funds.

Bull Market 

A period in the stock market wherein stock prices are rising is termed as a
Bull market

C

Capital Gains

Net profit/gains made on the sale of securities in the investor’s portfolio. If
the gains are generated out of sale of equity securities held for one year or
less, it is termed as short-term capital gain, and if the equity securities are
sold after being held for more than one year, it is termed as long-term capital
gains.

Capital growth

The rise/increase in the NAV of a mutual fund portfolio, usually aimed as a
long-term objective of mutual funds.

Certificate of Deposit

A short term debt instrument issued by scheduled commercial banks, with a
maturity of 3 months to 1 year.

Closed-ended schemes

A mutual fund that is based on issuing a fixed number of units to investors
which are redeemable from the fund only after the specified maturity period.
Investors cannot buy the units of the funds directly once the fund closes the
new fund offer. The fund is traded like a stock on the stock exchange
thereafter.

Commercial Paper

A short term unsecured promissory note with maturity of three months to 1 year,
issued by corporations to raise funds for short-term needs.

Commission/Brokerage

The fee paid to a broker or an agent for buying or selling securities, usually
basis a particular percentage of the transaction value.

Compounding

When the invested money earns interest and that interest, again earns interest
– the process is called compounding. Compounding occurs over the long-term and
thus, money acquires the potential to grow faster.

Corpus

The total amount invested by all investors, in a scheme.

Coupon rate

The interest rate on a bond or debt security that the issuer is obliged to pay
the holder until the instrument reaches maturity. It is usually given as a
percentage of the face value of the security.

Credit rating 

A process wherein a company’s information is analysed and a rating is assigned
in order to ascertain the issuer’s worthiness and capability of meeting future
payment obligations. Some credit rating agencies in India are CRISIL, CARE, and
ICRA etc.

Credit risk

The potential risk of an issuer defaulting on his obligation to pay interest or
principal on the debt security. It is this potential risk that is rated by
Credit Rating agencies.

Custodian

The bank/trust company that maintains and provides safekeeping of a mutual
fund’s assets, including its portfolio of securities.

Cyclical stocks

Stocks /securities whose prices are affected by ups and downs in the economy.
For example automobile, construction could see a surge during an economy upturn
and sectors such as healthcare could see more demand during times of crisis.
However, there are also non-cyclical sectors such as drugs and medicines which
would see demand, despite economic situations.

D

Debt Funds

Funds that invest in fixed income instruments such as bonds, debentures,
treasury bills, certificate of deposits etc. While these instruments are
relatively less volatile, they carry a credit risk and are preferred as a
risk-averse investment.

Dematerialization

A process of converting physical shares into electronic format is called
dematerialization. Once converted, the shares are stored in a Demat account
with an entity called a Depository Participant.

Derivatives

An investment instrument that derives its value from the underlying asset which
could be stocks, commodities, gold etc. Some of the most common derivatives are
Options and Futures.

Diversification

The process of spreading funds across various investments options and asset
classes which are relatively less correlated, to reduce the overall risk of the
portfolio.

Dividend

A portion of profits that the mutual fund or company, distributes amongst its
shareholders or investors.

Dividend Distribution Tax

Dividend Distribution Tax is the tax levied by the Indian Government on
companies according to the dividend paid to the company’s investors.

Dividend Frequency

The intervals at which a scheme’s dividends are paid out.

Dividend History

Past record of dividends declared by the fund, till date.

Dividend per unit

Total dividend declared by a fund for a scheme divided by total number of units
issued to all investors, is called Dividend per unit.

Dividend reinvestment

Through this option, dividend is reinvested in a scheme itself. Thus, instead
of receiving the dividend, the unit holder receives units purchased from that
dividend.

E

Entry load

A fee charged on mutual fund purchases. In India currently, entry load is not
allowed to be levied on mutual fund schemes.

Equity Linked Saving Scheme

A mutual fund product that gives investors the option of investing in equities
alongside tax saving benefits. An investment up to Rs. 1,50,000 under ELSS
qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. The
long term capital gains on sale of units are not taxable in the hands of the
investor.

Equity Schemes

Mutual fund schemes where more than 65% of the investments are done in Indian
equity and equity related securities, over a long term horizon are termed
equity funds/schemes. The performance of equity funds are linked to stock
market performance and fluctuate similarly.

Ex-Dividend Date

The ex-dividend date is the day on which all shares are bought and sold and no
longer come attached with the right to receive the most recently declared
dividend. On the Ex-Dividend Date, the fund’s NAV will fall by an amount equal
to the dividend and/or capital gains distribution.

Exit Load

A fee charged by mutual fund companies when units are sold is termed as Exit
load. The amount may depend on how long the investment is held in the
particular fund.

Expense Ratio

A ratio of total expenses to net assets of the fund. These expenses include
management fees and other administrative fees

F

Face Value

The original issue price of a bond, stock or other financial instrument. Also
referred to as par value or nominal value of the instrument.

First In First Out Method (FIFO)

A commonly practiced method of computing tax on capital gains realised during
sale of mutual fund units. Under this method, it is assumed that the units that
are sold were purchased first.

Fiscal Year

An accounting period that consists of 12 consecutive months (April-March)

Fixed income securities (FIFO)

A security that offers the investor a fixed rate of return. Such investment
avenues are preferred for their relatively low volatility and stable returns.

Floating Rate Bonds

When bonds offer interest rates that are subject to market fluctuations, they
are said to be floating rate bonds. These rates often have a specified floor
and ceiling, which limit fluctuation of the rate.

Folio number

A unique number that identifies the investor account with the fund is called
the Folio number, such as the bank account number. The Folio number serves as a
distinct identification for the investor and keeps track of their transactions.

Fund Manager

An expert who takes the decision to invest the money collected by a mutual fund
scheme, across several investment avenues

Fund of Funds (FOF)

A mutual fund scheme, that invests in other mutual funds.

G

Gilt Funds

Funds that invest only in government securities with varying maturity periods.
The main feature of gilt securities is that they are virtually credit risk free
as they are issued by the government and offer steady returns.

 

Government Securities

Securities that are issued by the government, to the public. For example,
government bonds, treasury bills etc

H

Holdings

The securities held in an investor’s portfolio
are referred to as his holdings

I

Inception date

The Inception Date for a mutual fund is the date from which the fund started
operations and the returns are calculated.

Income / Debt Funds

A mutual fund category that seeks to generate income by investing in interest
bearing instruments such as corporate debentures, PSU bonds, gilt securities,
commercial papers etc. These funds are comparatively less risky and are
preferred by risk-averse investors.

Index Funds

Index funds are equity mutual funds with a portfolio that mirrors the market
indices like BSE Sensex etc. The performance of such funds closely tracks the
performance of the index subject to a tracking error.

Inflation

The rise in the price of goods and services over a period of time, defined by a
percentage, is called inflation.

Investment objective

The specific, stated purpose of a mutual fund scheme.

Investment strategy

The guidelines that the fund has to follow with respect to the asset category
that it invests in

J
K

Know Your Customer
(KYC)

Know Your Customer is the process of verifying
the identity of a client. Ensuring a client/customer is KYC compliant, protects
both, the investors and the advisers by obtaining detailed information from the
client about his risk tolerance, investment knowledge and financial position.

L

Liquid funds / money market funds

Mutual fund schemes, that invest the money in short-term instruments like
treasury bills, commercial papers, certificate of deposits, etc., that mature
in shorter time intervals, thus providing the investor with easy access to the
funds, when needed.

Liquidity

The ease, with which an asset can be converted into liquid cash, is termed as
liquidity. Mutual funds are generally considered relatively liquid, as compared
to other investment avenues, as they can be bought and sold at any day.

Load

The charge/free, levied by mutual funds, while buying or selling units of the
scheme.

 

Lock in period


The fixed period for which, fresh investment in a fund, cannot be redeemed by
the investor

M

Management fee / expense

A fee charged by the Asset Management Company, within the limits laid down by
SEBI, for managing the mutual fund scheme.

Market capitalization

Market capitalization is the total market value of a publicly traded company,
calculated by multiplying the market price of the security with the number of
outstanding shares in the market. Market capitalisation of a company is
calculated by multiplying the stock price with the total number of outstanding
shares.

Market risk

The uncertainty of market situations that makes the price (in case of mutual
funds, the NAV of the units) of a security go up or fall down. Such movements
are dependent on economic, political, or other internal/external factors.

Market volatility

The fluctuation of the price of a security due to internal and external market
conditions is termed as market volatility.

Maturity date

A specific date on which a time-bound financial instrument (debt instruments)
is set to be repaid in full, to the investor.

Maturity value

The amount that is paid to the investor by the issuer, on the maturity date.

Modified Duration

The percentage change in the price of a bond including the accrued interest for
a given change in the bond yield, is called modified duration.

Money market fund

A mutual fund category that invests in highly liquid financial instruments such
as treasury bills, certificate of deposits, commercial papers, and pay money
market rates of interest

N

Net Asset Value (NAV)

The NAV is the market value of a mutual fund unit, calculated on each business
day. The Net Asset Value of a mutual fund scheme varies from scheme to scheme
and changes, as the holdings of the fund increase or decrease.

Nifty 50

An index formed on basket of 50 specified stocks, listed on NSE.

No-load fund

Mutual fund schemes wherein there is neither an entry, nor exit load

O

Offer Document/Prospectus

A legal document issued by the Mutual Fund, informing potential investors about
the characteristics, investment objective, policies and services and other
important information pertaining to the scheme, as is required by SEBI.

Offering period

The period during which, the initial offer to public is open for purchase of
units.

Open-Ended Fund/Scheme

A mutual fund scheme, for which purchase or sale of units is allowed on a
continuous basis, such that an investor can buy or sell units of the scheme,
any time he wants. The scheme also doesn't have a fixed date of redemption

P

Performance 

The returns generated by a mutual fund scheme over a period of time. Returns
can be generated, either by way of income distribution or capital appreciation
in the value of investment. However, past performance of scheme is no guarantee
for future returns

Portfolio

Consolidated investment options in which a mutual fund invests the customers'
funds. The mutual fund portfolio may include a combination of bonds, stocks and
money market instruments.

Portfolio churning

Keeping in mind the market movements, the fund managers make revisions in the
mutual fund portfolio with the aim to safeguard the investors' funds. The
process is called portfolio churning.

Price of units

The price at which a mutual fund scheme is offered for repurchase or sale, on a
daily basis

Q
R

Rate of Return

Expressed as a percentage, the total proceeds earned from the investment.
Returns are divided into income distribution and capital appreciation.

Record Date

A cut-off date, after which the total number of unit holders of a fund are
finalised. These are the final unit holders who are entitled to receive any
benefits associated with the fund.

Redemption

Buying back or cancellation of units of a scheme, either on an on-going basis
or on maturity of a scheme. Investor is paid an amount linked to the NAV of the
scheme.

 

Redemption Price

The price at which an investor can redeem his mutual fund units is calledredemption price. The redemption price is linked to the NAV per unit.

Registrar

An agency that handles all the unit holders' data and records for the AMC, is
called a registrar.

Reinvestment Date

A specific date on which, the dividends or capital gains from a scheme is
reinvested to purchase additional units of the scheme.

Risk Adjusted Returns

Every investment entails a certain amount of risk. The expected return from the
investment adjusted for varying levels of risk is termed as risk-adjusted
returns.

Rupee Cost Averaging (SIP)

Rupee Cost Averaging is an investment technique applied to regular fixed
instalments in a mutual fund scheme. As the amount is fixed and regular, more
units are bought when the market price of shares is low and lesser units are
bought when the price is high. Through this mechanism, the investment risk is
spread across market movements

S

S&P BSE 500

A market-value weighted index that is a measure of the performance of the 500
widely held common stocks, also used as a benchmark index for comparing mutual
fund scheme performances.

SEBI

Stands for Securities and Exchange Board of India, established in 1992. SEBI is
the regulator of capital markets in India.

Sector Fund

Mutual fund schemes that invest predominantly in a particular sector such as
automobile, infrastructure, IT and consumer goods etc. Sector Funds are
comparatively more volatile but also carry the potential for greater returns,
ideally suited to an investor class with a higher risk appetite.

Securities

The underlying investment of a mutual fund, which could be stocks, bonds, money
market instruments etc.

Shareholder

An individual, who after purchase becomes the owner or a stock or share of amutual fund.

Sponsors

An entity, who establishes the Mutual Fund, along with an individual/body
corporate, after applying to SEBI for registration,. The Sponsor is closely
associated with the AMC and has to contribute a minimum of 40% of the new worth
of the AMC.

Switching

Switching is referred to as the process of transferring the investment form one
fund to another. Investors may choose to switch their assets between funds in
the same family or into a different family altogether.

Systematic Investment Plan (SIP)

A Systematic Investment Plan, allows the investor to buy units of a mutual fund
scheme, by paying regular, fixed instalments in a systematic manner. Further to
such instalments, proportionate units of the scheme are purchased depending on
the market price - more units when the price is low and lesser units when the
price is high. An Investor can automate his instalments through an auto-debit
from his account to ease the process of investment. 
A SIP is an effective tool to build a sizeable corpus in the long term as it
provides benefits such as compounding and rupee cost averaging.

Systematic Transfer Plan (STP)

A Systematic Transfer Plan allows the investor to transfer a fixed amount from
his investment in one scheme to another, on a periodic basis.

Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan allows the investor to withdraw and receive
pre-determined amount/units from his investment in a particular mutual fund
scheme, periodically.

S&P BSE Index

Stock market index formed by a basket of 30 companies listed on Bombay Stock
Exchange which also referred to as the benchmark for stock market movements.

T

Tax Saving Fund

Commonly referred to as Equity Linked Saving Schemes, these funds have a lock
in of three year post the initial investment. The objective of a tax saving
fund is to create a portfolio that aims for tax exemption under Section 80C of
the Income Tax Act, having an upper limit of Rs. 1,50,000.

Top-down investing

A top-down investment approach focuses on the global economic and political
scenario in countries that could be potential investment grounds and then
employ a fundamental analysis approach towards selecting individual stocks into
the final portfolio.

Transaction costs

The cost incurred during the buying and selling of securities in a fund and the
commission paid to the broker is called transaction cost.

Treasury bills

Short term debt instruments, issued by the government with a maximum maturity
of one year.

Trustee

A person or a group of persons who hold the authority and oversee the
operations of the Asset Management Company, to upheld the best interest of the
investors.

U

Unitholder

The owner of the units in a mutual fund scheme.

V

Value investing

An investment approach through which, the funds are invested in undervalued
stocks with strong fundamentals that are believed to be trading at a discount
to their intrinsic value and may have the potential to bounce back and in the
future. The investment in such stocks is made after thorough research of the
industry and economy in which the company operates.

Volatility

Volatility in the markets refers to ups and downs in price of stocks which
leads to fluctuations in the price of the mutual fund scheme that invests in
it.

W
X
Y

Year-to-date (YTD)

A calendar time period, starting from the first month of January to the present
date in that calendar year, usually used to calculate returns on an investment
from 1st January up to required date.

Yield

The returns from an investment, that do not include capital gains or capital
appreciation is called yield. It is expressed as a percentage of the NAV or
market price.

Yield Curve

The yield curve depicts the relationship between the yield on the investment
and time. The more the time for which the money is invested, the higher is the
positive expectation of yield, under normal circumstances.

 

Yield to Maturity

The yield on a bond when it is held till maturity date

Z

Zero coupon bond 


A bond that is sold at a discount to its face
value is called a zero coupon bond. However, such a bond does not give periodic
interest payments and pays the principal on maturity.