Mutual Fund Glossary

Account Statement
It is a document issued by a Mutual Fund house in lieu of a unit certificate, giving the details of the transactions and the fund units held by an investor.

Adjusted NAV (Total Return)
It is the Net Asset Value of a mutual fund unit adjusted against all the changes caused due to bonus, dividend declaration etc. assuming that the reinvestment of distributions are made to the investors at the prevailing rate.

Annual Report
It is a report holding the record of a Fund’s audited financial statements and performance over the last one year. According to the guidelines of SEBI, it is to be distributed to the shareholders and investors.

Annualized Returns
Ideally used for comparison purposes, it is the return that an asset gains over a horizon of one year.
OR
Returns can be calculated on two bases- Absolute and Annualised. Absolute returns generate within a period of less than one year while Annualised Returns are generated over a period of more than one year.

Arbitrage Funds
The type of funds that take opposite positions in different markets such that a return is earned, simultaneously/meanwhile neutralizing the risk. They are classified as equity funds that take contrary positions between the equity and the futures and options market.

Average Cost Method
Average Cost Method allows you to arrive at the average price of the units of a fund by adding all costs associated with purchasing and then dividing the sum by the total number of units.

Average Maturity
Average Maturity is the key variable to understand the interest rate risk. It is the weighted average of current maturities of all the debt securities held in a bond portfolio. Longer the maturity, higher the interest rate risk.

Absolute Returns
Returns can be calculated on two bases- Absolute and Annualised. Absolute returns generate within a period of less than one year while Annualised Returns are generated over a period of more than one year.

Actively Managed
The portfolios of actively managed funds are designed by the judgement of a Fund Manager about how to invest a fund’s money and which all securities to buy and sell.

Alpha
It is a measure of a fund’s performance where the excess return generated over and above the benchmark index is considered.

ARN
It is the Registration Number issued by AMFI to the mutual fund brokers, sellers or agents. It is basically a unique code that enables a qualified distributor to sell the mutual funds.

CAGR
Also known as Compound Annualised Growth Rate, it is the rate of interest compounding at which cash flows grow with respect to a fixed period of time.

Call Money
Traded in the Money Market, this money is called on short notice and is repayable in 24 hours.

Capital Appreciation
It is referred to an increase in the value of a stock, bond, real estate or commodity.

Capital Growth
Considered as a long term objective for mutual funds, it is reflected as a rise in the market value of securities shown by its net asset value.

Certificate of Deposit (CD)
These are the money market instruments generally issued by banks having maturities from 7 days to one year or by financial institutions having maturities of 1 year to 3 years.

Close-Ended Fund
A type of fund which does not allow issuance and redemption of units on a continuous basis like open-ended mutual funds. They are open for new purchase only at the time of their New Fund Offer. They are listed on stock exchanges and also carry a Net Asset Value (NAV) and have a maturity date.

Closing Price
This term is used to define the price at which the final trade of the day takes place.

Commercial Paper
Commercial Papers are unsecured debt instruments issued by companies for a short term, usually to finance the working capital needs.

Commodity
It is a product such as metal, gold, food or any other substance that is traded on a Commodity Exchange.

Convexity
Convexity is a measure of how the duration and price change with respect to a change in the interest rates.

Coupon
It is the interest rate on a debt security which the issuer is obliged to pay to the holder until its maturity.

Credit Rating
It is a measure which reflects the credit worthiness of a bond issuer or the ability of a company to repay its loan. Ratings of the agencies such as CRISIL, ICRA are well-known in the mutual fund industry.

Credit Risk
Referred as the potential / possibility of an issuer to default on its obligation to pay back its principal or interest on its debt security. Most government securities are said to have little or negligible credit risk.

Debt funds
A term representing money borrowed that is to be repaid to the lender at a future date. T-bills, Bonds are common debt instruments and different securities vary in their maturities.

Default
Default refers to the failure towards payment of the interest or principal of a financial obligation.

Derivative
An instrument whose value is derived from the value of an underlying asset, which includes currency, commodities, stocks, precious metals etc. The most common examples of derivatives are Futures, Forwards, Options and Swaps.

Direct Plan
Direct Plans have been introduced by SEBI from Jan 1, 2013, allowing the customers to buy units directly from the Fund House. These plans have higher returns and lower expenses to the extent of commission paid to distributors.

Diversification
The strategy of spreading investments across a range of securities with an attempt to reduce risk. Moreover, it cushions your overall investment against the negative returns from a single asset class.

Dividend
Dividend is the income distribution to shareholders that is generated from the earnings/ net income from a mutual fund. A change in the dividend rate does not affect the fund’s share price, however, the NAV of a fund unit falls after the dividend is paid.

Duration
Considered as a measure of risk, it is the relation between the price and the yield of the bond. It can be calculated by taking the weighted average of all the cash flows associated with a bond in terms of their present value.

Dividend Yield
Dividend yield can be defined as the dividend per share divided by the share price. It is an important ratio which helps in selecting stocks; where valuation wise, high dividend yield stocks are more attractive as compared to low dividend yield stocks.

It is considered as an important ratio for value investors as high dividend yield stocks usually give returns in volatile and down markets; even if share prices are down, investors get cash-flows in form of high dividends. However, it is important to know for the investors that high dividend yield stocks will not necessarily give returns than low dividend yield stocks. Dividends are paid from the profit after tax (or earnings per share) of a company. Profit after the tax can either be paid out as dividends to shareholders or re-invested back in the company or combination of both, at the discretion of the management of the company. If the management thinks that there are opportunities to invest in the business for higher revenue and earnings growth then it will reinvest a greater share of the profit after tax in the business and consequently have a lower dividend payout rate (lower dividend yield). Higher earnings growth in the future, may lead to higher share price appreciation and future potential returns for shareholders. Some companies on the other hand, may want to distribute a bigger share of the profits to shareholders and consequently have higher dividend yields. High dividend yield stocks are value stocks and tend to be more stable / less volatile than low dividend yield stocks. Investors should make informed decisions based on their risk appetite and investment goals.

Entry load
It is the upfront sales charge applicable on the purchase of mutual funds. Entry Load is currently abolished in India.

Exchange Traded Fund
Popularly known as ETFs, these are similar to index funds replicating a benchmark index. Just like equity stocks, ETFs are also traded on stock exchanges but have lower expenses charged to the fund. It is mandatory to have a demat account while trading in ETFs.

EUIN
Employee Unique Identification Number is issued by AMFI to the sales person or relationship manager of the distributor who interacts with the investor for the sale of mutual funds. EUIN assists in situations of mis-selling even if the EUIN holder is no longer associated with the distributor.

Exit Load
Exit Load can be referred to as the charge levied on schemes at the time of exit.

Expense Ratio
It is the ratio of total expenses to net asset of a particular fund. Expenses such as management fees, administrative expenses, cost of shareholder mailings are considered for valuation. Generally, Equity Funds bear a higher expense ratio as compared to the Debt Funds.

Ex- Dividend Date
The date on which a fund’s Net Asset Value will fall by an amount equal to capital gains distribution or dividend.

Equity linked Savings Scheme
A type of equity mutual fund scheme that invests primarily in equity and equity related securities. It has a lock-in period of three years and provides tax benefits to the investors.

Ex-Dividend Date
The date of the distribution of dividend. As soon as the dividend is paid the NAV of the fund falls by the amount of the dividend.

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

Exit Load
A fee charged to investors during the time of redemption from the mutual scheme and it generally depends on the holding period of the scheme.

Expense Ratio
The ratio between the annual percentage of the fund’s asset deducted for fund’s expenses. These funds comprise of management fees and other fees associated with the fund’s daily operations.

Earnings per share
Earnings per share or EPS refers to the profit after tax of a company divided by the total number of shares outstanding. It is the measure of profitability of a company; higher the EPS usually better is the profitability. EPS is considered to be the most important factor in share price appreciation and therefore, this ratio is looked upon very carefully by the Fund managers and analysts when selecting stocks for investments.

EPS can be impacted by various factors like spin-offs, divestitures, acquisitions etc. The reported EPS numbers are normalized by the analysts so that they can make like to like comparisons for quarter on quarter or year on year EPS growth. Apart from EPS growth fund managers, analysts place a lot of importance to earnings visibility. Many companies also provide guidance on future EPS growth but companies may not be able to provide near term or medium term guidance during economic downturns. Apart from management guidance, analysts also try to analyze EPS growth to various factors like:-

Is it due to improvement in operating margins?
Market share
Share buybacks
Is it due to growth in sales?
Increase or decrease in financial leverage (debt / equity ratio)
Pricing power of the company

Companies with consistent high EPS growth and good earnings visibility are mostly preferred by the investors.

Equity Mutual Funds
Equity mutual funds are mutual fund schemes which invest primarily in equity and equity related securities of the companies. Although the historical data of these funds shows us that equity is the best performing asset class, these also are categorized as the highest riskiest investments. For investing in equity funds, it is recommended for the investors to have a high risk appetite since the risk profile of equity funds range from moderately aggressive to aggressive. Equity funds can be classified into several sub-categories depending on their investment characteristics. As per SEBI’s directive, following are the different equity fund categories based on their market cap characteristics:-

Large cap funds
Large and midcap funds
Multi - cap funds
Midcap funds
Small cap funds

Further classifications are based on investment strategies / styles e.g.

Focused funds
Value funds
Dividend yield funds

Most equity funds are diversified having an investment in themes or sectors which are known as thematic and sector funds respectively. Although sector funds are considered to be among the riskiest equity fund categories, these investments may give potential returns if planned well in terms of entry and exit. However, which category of equity fund you invest in, you should always have a long investment horizon and high risk appetite for equity investments. Further, it is always advisable to consult your financial advisor before investing.

Face Value
Face Value is the issue price of a mutual fund unit, on the basis of which dividends are calculated.

Fact Sheet
A monthly overview of the details regarding the investments made by a mutual fund scheme along with asset allocation, risk level, returns, performance etc.

Fixed Income Securities
A security that pays an investor a certain rate of return but has limited potential for capital growth. Traditional products like Fixed Deposits and Government bonds which give stable returns are also categorized under Fixed Income Investments.

FMP
Fixed Maturity Plan is a close ended fixed income scheme which has a defined term after which the scheme ceases to exist.

Folio
A Folio is an identification number which depicts an investor’s holdings in the various schemes of a Fund House. It is unique, much like a bank account number.

Fund Manager
Referred to as a Portfolio Manager, he is the one who decides and manages investments in a scheme. He is accompanied by a team of research analysts.

Fund of Funds (FOF)
A type of fund which invests in other mutual funds, unlike the normal categories which directly invest in equity, debt and money market instruments.

Face Value
The initial issue price of one unit of the scheme.

Floating Rate Funds
Funds that invest in debt instrument with variable or floating interest rate. The returns or coupon rates fluctuate in line with the underlying interest rate. Usually, the interest rates on these bonds are tied to a money-market index such as MIBOR, the most commonly used index.

Fixed maturity plans
Funds whose maturity of the debt papers invested in is closely affiliated to the maturity of the scheme. These schemes are structured around pre – identified investments and do not accept post-NFO as they are close ended schemes.

Fund Category
The categorization of a particular scheme depending on the type of assets in which the mutual fund scheme invests its corpus. Certain categories are, equity, debt, balanced, gilt, gold ETF, liquid category etc.

Fund Management Costs
The charge or fees charged by a mutual fund scheme for managing the investors’ funds.

Indexation
Cost inflation index is an index specified by the central government that is linked to wholesale prices. The year of purchase and the year of sale are used for the purpose of calculating 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. In selling debt-oriented fund schemes, one can choose for paying tax at the rate of a flat 10% or go in for paying 20% after taking the benefit of indexation.

Inflation
A reduction in money value due to the rise in the price of goods and services over a period of time.

Investment Management
Analysis of investment and execution of investment plans in alignment with the investment objectives.

Investment Objective
The financial goal (long-term growth, current income, etc.) pursued by an investor.

Interest rate risk
The change in the value of a security due to an increase or decrease of interest rates. The bond prices and interest have an inverse relation.

Launch Date
The date on which the scheme is made available to public for subscriptions.

Liquid Funds /Money Market Funds
Funds investing only in short-term money market instruments such as treasury bills, commercial paper and certificates of deposit. To provide liquidity and preserve the capital is the objective.

Liquidity
The effort with which an asset can be converted to cash. Mutual fund units are mostly considered highly liquid investments as they can be sold on any business day at their present net asset value.

Load
A charge that might be imposed as a percentage of the NAV at the time of investment in a mutual fund scheme or during the time of redemption or exit from the schemes.

Large cap Stocks
These are the 100 largest traded companies by market capitalization as per SEBI’s circular. By market capitalization, we refer to the share price multiplied by the number of outstanding shares of a company. Moreover, as per SEBI’s classification, equity mutual fund schemes which invest at least 80% of the total assets in stocks are categorized as large cap funds.

Large cap companies have large sized balance sheets and fairly large market share in their respective industry sectors. Therefore, they have management depth, large organizations and adhere to certain standards of corporate governance. Talking about the riskometer profiles, these schemes are moderately high risky schemes.

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 or Maturity Date
The date on which the investor gets back the principal investment that has matured.

Minimum Additional Investment
The least amount that which an existing investor should invest for purchasing fresh units.

Minimum Balance
It is the minimum amount specified to remain invested in the scheme at any given point in time.

Modified duration
Modified duration implies the percentage change in the bond price for a unit change in yield.

Money Market
It is a market for very short-term securities. They are debt securities that mature in less than a year and are highly liquid in nature. Securities such as Treasury Bills and Call Money make up the majority of trading in the money markets.

Money Market Instruments
It refers to Treasury Bills, Commercial Papers, Call Money, Certificates of Deposits, GOI Securities and any other instrument mentioned by the Reserve Bank of India that have maturity period of less than or up to one year.

Mutual Funds
An investment company that pools money from its unit holders 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.

Midcap Stocks
Mid Cap Companies have smaller turnover, market share and balance sheets in comparison to large cap companies and larger turnover, market share and balance sheet in comparison to small cap companies. Although Mid Cap Stocks are more extensively covered than small cap companies, they tend to be less researched than large cap stocks.

Going by SEBI’s circular, these are the 101st to 250th traded companies by market capitalization. Moreover, as per SEBI’s classification, equity mutual fund schemes which invest at least 65% of the total assets in midcap stocks are categorized as midcap funds.

Since the stock market segment of the mid cap funds are not as liquid as large cap segment, it is considered to be more risky. On the other hand, these schemes have a lower risk than the small cap funds, consequently, the riskometer is usually moderately high.

Therefore, there is a considerable scope of price discovery in the mid cap segment with respect to the large cap; fund managers can tap the potential of under-valued mid cap stocks and deliver potential returns to investors in the long run. But, midcap stocks are much more volatile than large cap stocks, so, the investors should be prepared for high volatility.

Modified Duration
Bond prices decrease in response to an upward movement in interest rates, likewise bond prices increase when interest rates decrease. Because of this inverse relationship between bond prices and yields (Interest rate) it is important to know how sensitive the bond price is to interest rate changes.

The Modified Duration is a measure of the price sensitivity of the bond to interest rate movement, it helps in predicting how sharply the market price of a bond will change as a result of changes in interest rates.

For instance, the Modified Duration of a debt fund is 2.7 years then a 1% increase in interest rates can result in a 2.7% decrease in the value of the fund. Similarly, a 1% decrease in interest rate can lead to 2.7% increase in the fund value.

Key Points:

The duration of a debt fund is used to infer how the value of the portfolio would change in response to changes in interest rates.
The higher the modified duration of a debt fund, the higher its sensitivity to market interest rates.
If interest rates are expected to fall down (which implies bond prices will rise), it is advisable to invest in long duration funds and if interest rates are expected to raise (which implies bond prices will fall), it is advisable to invest in Short duration funds.
Short duration funds like liquid fund or ultra short term fund will have low duration and long term funds like Long term bond fund will have higher duration.

Macaulay Duration
Macaulay Duration is among the key factors that helps in measure the risk of the fund, Just like the risk in equities can be measured through standard deviation, the risk in bonds can be measured through Macaulay duration.

Macaulay Duration is the weighted average term until the present value of the bond's cash flows equals the amount paid for the bond. In simpler words, Macaulay duration is the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments.

For Instance:

Face value	₹ 1,000
coupon	5%
Maturity	7 Years
Yield to Maturity	4%
Years	Coupon Amount	Maturity Value	Total Cash Flow	Present Value	Duration (weighted average)
1	₹ 50	-	₹ 50	₹ 48.08	0.05
2	₹ 50	-	₹ 50	₹ 46.23	0.09
3	₹ 50	-	₹ 50	₹ 44.45	0.13
4	₹ 50	-	₹ 50	₹ 42.74	0.17
5	₹ 50	-	₹ 50	₹ 41.10	0.21
6	₹ 50	-	₹ 50	₹ 39.52	0.24
7	₹ 50	₹ 1,000	₹ 1,050	₹ 797.91	5.59
Macaulay Duration					6.47 years

Key Points:

Relationship with other factors:
As maturity of bond increases, duration increases.
Increase in bond’s Coupon will result in reduction of duration.
Macaulay Duration can help investor choose the right debt funds to suit their investing horizon.

Net Asset Value (NAV)
The current market value of the investments held by the mutual fund scheme on any particular day. Calculated daily, on per unit basis, NAV is arrived at after deducting the expenses incurred by the scheme in managing the funds.

NFO Open date
The starting date from which investors can invest in a New Fund Offer (NFO).

NFO Close date
The last date for the investors to invest in a New Fund Offer (NFO).

NRE
Non Resident External Rupee Account, it is a kind of bank account for Non-Resident Indians (NRIs) where the amount is initially deposited in the domestic currency i.e. Indian Rupee (INR), and can be converted and repatriated back into the foreign currency.

NRI
A person of Indian residence who currently resides abroad.

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

Offer Document
An important document consisting of two part - Statement of Additional Information (SAI) and Scheme Information Document (SID). It contains Fund House and Scheme details.

Open-Ended Fund
These schemes are issued on a continuous basis at the existing NAV. They can be redeemed on any business day and are hence highly liquid.

Operating Margin
Operating margin is the ratio of operating income to the revenue of a company. Operating income can be defined as the profit of the company before paying interest and taxes. Operating margin is an important financial ratio and is an indicator of profitability of a company.

This ratio helps us to know how efficiently a company is using its assets and therefore, companies with operating margins are liked and preferred by the fund managers and analysts since they are likely to deliver higher earnings growth. If the companies have same growth rates in revenues, the one with higher operating margins will provide higher profit after tax (PAT) or earnings per share (EPS) growth compared to a company with lower operating margin.

However, while looking at the Operating Margin, one should take care of not comparing this ratio of the companies across sectors. For example, businesses which have less pricing power (e.g. commodities) tend to have lower operating margins than businesses with strong brands which have higher pricing power.

Passive Funds
Mutual fund schemes that mirror the composition of the index whose performance they seek to track. For example, a passive fund tracking the S&P BSE Sensex would buy only the shares that form part of the index. The proportion of each share in the scheme’s portfolio is also similar to the weightage assigned to the share in the composition of the BSE Sensex. Thus, the performance of these funds tends to mirror the concerned index.

Payout Day
The day when the trading and members of brokers are delivered their payment made by the exchange.

Performance
It indicates the returns from an investment. It shows us how the scheme has performed in the past and how it is performing currently.

Public Sector Undertakings (PSU) Bonds
PSU companies (entities where the government shareholding is greater than 51%) issue medium- and long-term bonds known as PSU bonds.

Purchase Price or Offering Price
It is the price at which mutual funds units can be bought. It is the current net value per unit plus sales charges.

Price to earnings ratio (P/E Ratio)
The ratio of the company’s share price to the earnings per share.

Price Earnings Ratio
One of the most important terms in equity investing, Price Earnings Ratio or PE ratio is the ratio of share price to earnings per share (EPS). In other words, it can be defined as the payment you have to make to buy Rupee 1 of EPS of a stock. This ratio helps in analyzing whether a stock is expensive or cheap, where a high PE ratio can imply that a stock is expensive, while a low PE ratio may imply that a stock is cheap.

However, the usage of PE Ratio is not limited to just one interpretation, because a high PE Ratio also implies that investors are ready to pay more to buy Rupee 1 of EPS and this is because they expect the earnings per share of the stock to grow faster in the future. Similarly low PE ratio can imply that investors do not expect the EPS to grow very fast.

Also, PE Ratio contributes towards an individual’s investment strategy. Talking about the growth, investors, like to invest in stocks which are expected to give high EPS growth and are therefore, ready to pay more for such stocks. Value investors, on the other hand, want to invest in stocks that are trading at low prices. As a result, Growth stocks have high PE ratios and Value stocks have low PE ratios.

Scheme Information Document (SID)
A legal document that is one of the most important sources of information on a mutual fund scheme and helps investors take a balanced view on the investment. It also helps prospective investors evaluate the merits and demerits of investing in the scheme.

Sector funds
Funds that invest only in a specific sector such as a banking sector fund will invest in only shares of banking companies.

Sharpe Ratio
the measure of the adjusted risk return on a fund. It tells us weather the fund gives out returns to the amount of risk taken by the investor. More the Sharpe ratio better the returns promised by the fund

Statement of Additional Information (SAI)
It has information about the mutual fund that is offers the scheme. It states that a single SAI is relevant for all the schemes offered by a mutual fund. Technically SAI, is a part of SID.

Switch
Redemption of a unit in any scheme (including the plans / options therein) of the Mutual Fund against purchase of a unit in another scheme (including plans / options therein) of the same Asset Management Company subject to completion of lock-in period, if any, of the units of the scheme(s) from where the units are being switched.

Systematic Transfer Plan (STP)
A plan that permits the investor to give authorization to the fund to periodically and systematically transfer a pre-determined amount from one scheme to another.

S & P BSE Sensex Index
The index consisting of the equity prices of select 30 blue-chip companies listed on the Bombay Stock Exchange (BSE) which generally represent the stock market movement.

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 over a specified period of time, which includes share-price appreciation, reinvested dividends or interest, and any capital gains.

Treasury bills (T-Bill)
These are short term debt instruments with a maturity of one year or less issued by the Reserve Bank of India on behalf of the Government of India.

Tracking error
Difference between the scheme performance and that of its benchmark is called tracking error.

Repo Rate
Repo Rate refers to the interest rate at which the commercial banks borrow money from the Reserve Bank of India (RBI), in case there is a temporary shortfall in funds. Repo rate is the benchmark interest rate in our economy.

Repo Rate is one of the tools of RBI to regulate the money supply in a country; if the Repo Rate increases, there is less incentive for banks to borrow money from RBI, therefore, Repo Rate hike reduces the amount of money supply (liquidity) in the banking system. Consequently, Repo Rate helps in controlling inflation; when inflation is high, RBI increases the repo rate to control inflation by reducing money supply. On the other hand, when economic activity is not in a good state and inflation is low, RBI can reduce repo rate, encouraging banks to lend to increase economic activity (GDP).

It is the most important interest rate of our economy and provides a fundamental basis of interest rate setting for deposits and loans by banks.

Value Stocks
Stocks having lower price-to-book and price-to-earning ratios, higher dividend yields and lower forecasted growth rates than growth stocks are considered to be undervalued and hence value stocks for investors.

Volatility
Volatility refers to the fluctuations in the market price of the security over a short period of time. Volatility is often measured using measures such as beta, standard deviation, R–squared and Sharpe ratio.

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