Glossary

Learn about investment terminologies

A

Automatic Reinvestment

A mutual fund can issue dividends. The automatic reinvestment option is a service the fund house provides to shareholders, giving them option to purchase additional shares using dividends automatically.

Annualized returns

This is the rate of return a mutual fund provides for less than a year but is calculated as one year.

Average cost method

This is calculated by dividing the total investment by the total number of shares owned in a mutual fund.

Alpha and beta in mutual funds

Alpha is the comparison of the mutual fund relative to the benchmark index. Beta is the amount of volatility the fund goes through compared to market volatility.

AUM

A mutual fund pools money from investors and uses this money to buy assets like stocks, bonds and other securities. The total value of the assets a fund buys is called the assets under management (AUM).

Asset Management Company (AMC)

This is a company that invests funds from investors into mutual funds. It invests in different asset classes like equity, debt, real estate, bullion etc. depending on its category.

AMFI

AMFI is the association of SEBI registered mutual funds in India of all the registered asset management companies.

ARN

The AMFI Registration Number (ARN) is a unique code that is given to corporates, individual agents, brokers, and other intermediaries engaged in selling Mutual Funds

Ask price

This is the lowest price a seller will accept for the bond.

Assets Under Management (AUM)

B

Bonds

A bond is a loan given by an issuer (company) to its lenders.

Bond IPO

The date when a bond is first issued in the market.

Bearer bonds

A bearer bond is a bond that is owned by whoever has it. It has no fixed owner.

Bondholder

The owner of a bond is called a bondholder.

Bond rating

A bond rating is a letter grade given to a bond to indicate its credit quality. It corresponds to the cost of borrowing in the market

Bond risk

These are all the risks associated with a bond like liquidity risk, credit risk, ratings downgrade risk etc.

Bid price

This is the highest price an investor will pay for a bond.

Bond Rating

A bond rating is a letter grade given to a bond to indicate its credit quality. It corresponds to the cost of borrowing in the market

C

Capital Gains Distribution

Apart from dividends, mutual funds also distribute the profits it makes from selling some of the underlying assets at higher values. This is called capital gains distribution.

Commercial paper

This is a debt-market instrument, issued by corporations to raise money for the short term. They are usually unsecure as the company does not pledge any of its assets as collateral.

Certificate of Deposit (CD)

This is a kind of debt-market instrument issued by banks or financial organizations. It acts as a proof of saving by the investor and promises interest payments.

Cash Flow

The cash flow of a bond is the present value of a bond’s future interest payments and the bond’s value upon maturity.

Coupon Rate

The annual income that an investor can expect to receive from a bond is the coupon rate.

Capital gain

Returns are earned from your investments as well as the annual dividends received (if any). The profit you earn from selling your assets like bonds, shares, mutual fund units, property etc., is called capital gains.

CAGR

CAGR (compound annual growth rate) is an investment’s average yearly growth rate over a specific time. The investment’s value is supposed to have multiplied over time. As a result, it can accurately depict the annual returns on investment.

Certificate of deposits

This is a kind of debt-market instrument issued by banks or financial organizations. It acts as a proof of saving by the investor and promises interest payments.

Credit rating

A credit rating essentially reflects how credit-worthy an investment is. It is assigned to an investment or the issuer (company or an organisation) by credit rating agencies like CRISIL and ICRA after assessing their ability to repay loans.

Contra mutual fund

These are mutual funds that invest in companies and sectors that are not doing well currently.

Credit Risk

This is a risk arising from the possibility that a borrower may not be able to pay back its loan.

Corporate bond

These are bonds issued by corporates or companies.

Coupon

This is the annual interest rate paid on a bond.

Coupon yield

The amount of returns that you get from a bond is called the yield.

Call

The date the issuer of a bond has the right to redeem the bond is called a call date.

Call protection

This is a provision that prevents the issuer of the bond from redeeming the bond for a specific amount of time.

Call risk

This is a term that means the bond issuer might redeem the bond before the maturity date.

Collateralized Mortgage Obligation (CMO)

This is a pool of home loans (mortgages) that is sold one investment unit.

Call provision

This is a provision where the bond issuer can repurchase and retire their bonds.

Compounding

When you invest in a financial asset, you earn on the amount invested. Over time, you can either reinvest this amount or put it in a bank account. Either way, you earn some amount on your existing profits – either through investment returns or from bank interest. Thus, your total returns over time increase. This is called compounding. Over time, compounding can produce significant growth in the value of an investment.

D

Diversification

Diversification is one of the key benefits as well as characteristic of a mutual fund. It is the practice of investing in different types of securities or asset classes. This is done to reduce risk.

Dividend Yield

The dividend yield gives a measure of how much an investor is earning (per share) from the investment by way of total dividends. It is calculated by dividing the dividend announced by the share price, and then multiplied by 100.

Dividend

Dividends are payments that a company makes to its shareholders.

Dynamic funds

They are debt scheme that seek to maximize returns through active management of a portfolio of debt and money market securities.

Dividend yield mutual funds

These are mutual funds that regularly declare dividends.

Dynamic mutual funds

They are debt scheme that seek to maximize returns through active management of a portfolio of debt and money market securities.

Default Risk

This is a risk where the borrower may not be able to meet their debt obligation.

Dividend Payout

This when dividends declared by the mutual fund are directly paid to investors.

Direct Plans

Direct plans is a way to invest in a mutual fund. It does not include the distributor/agent’s commission. That’s because you buy the mutual fund scheme of your choice directly.

Discount on bonds

This is when the market price of a bond is lower than its principal amount due at maturity.

Depreciation

This is the decline in your investment’s value in the mutual fund. This means, you will make a capital loss when you sell the mutual fund units.

E

Entry Load

Entry/front-end load is the amount a mutual fund charges when units are purchased by investors. This is usually rare.

Exit Load

This is the amount a mutual fund charges you for selling or redeeming your shares.

Exchange-traded Fund (ETF)

An exchange-traded fund is an investment vehicle much like a mutual fund, but which is traded on stock exchanges. It generally tracks an index, a basket of assets or a commodity. The value of the fund keeps fluctuating like a share due to demand-supply forces.

Exchange traded fund (ETF)

An exchange-traded fund is an investment vehicle much like a mutual fund, but which is traded on stock exchanges. It generally tracks an index, a basket of assets or a commodity.

ELSS Funds

Investors are now encouraged to invest in the equity markets through the Equity Linked Savings Scheme (ELSS) by offering them a tax rebate. However, these funds cannot be redeemed for three years.

Exit load in mutual fund

This is the amount a mutual fund charges you for selling or redeeming your shares.

Entry load in mutual fund

Entry/front-end load is the amount a mutual fund charges when units are purchased by investors. This is usually rare.

Expense Ratio

Expense ratio is the cost of running and managing a mutual fund, which is charged to the scheme. The expense ratio is expressed as a percentage of the fund’s average daily net assets.

Ex-Dividend

This is the price of a mutual fund without the value of its next dividend payment.

Equity Mutual Funds

These are funds that invest only in stocks. As a result, they are usually considered high risk, high return funds.

Ex-Dividend Date

Just like companies, mutual fund houses too announce the amount of dividend to be distributed a few days before the actual distribution. The date of the distribution is called the dividend date. Once this happens, the fund’s net asset value reduces as the dividends are deducted from the fund’s assets. The day of this deduction is called the ex-dividend date.

F

Funds of Funds

Mutual funds invest in multiple types of assets like stocks and bonds. They can also invest across mutual funds. These are called fund of funds.

Face value

Also called ‘par value’, the face value of a bond is the amount the issuer pays when the bond matures.

Fixed income investment

These are investments like fixed deposits, bonds, debt mutual funds where investors earn a stable and predictable rate of interest.

Fund House

A company that owns and operates a mutual fund is called a fund house.

Face value

This is the stated value of an investment. This is the value of one unit of a mutual fund.

Fund Switch

Many fund houses group a set of mutual funds together based on their investment objectives, or other factors like management. This is called a family of funds. Fund houses then give investors an option to transfer their investments within the fund family from one scheme to another as and when they require. This is called a fund switch or an exchange privilege.

Funds of Fund

Mutual funds invest in multiple types of assets like stocks and bonds. They can also invest across mutual funds. These are called fund of funds.

Fund manager

This is an employee who manages the mutual fund on a fund house’s behalf.

Fund category

This is used to distinguish different types of mutual funds according to the assets they invest in, time periods and investment objectives among other parameters.

Fixed maturity plans

They are called as FMPs. They have fixed maturity that could range from a few months to a few years.

Fixed rate bond

This bond pays a fixed coupon rate for the life of the bond.

Floating rate bond

This bond doesn’t have a fixed rate. Its rate varies with the benchmark on which the bond is based.

G

Gilt fund

This is a debt scheme that investment in government bonds.

Growth funds

These are schemes that promise capital returns in the long-term. They usually invest in equities. As a result, growth funds are usually high risk schemes. This is because the values of assets are subject to lot of fluctuations.

Government securities

A government bond, also known as Government Securities or G-Sec, is a tradable financial instrument issued by the Central Government or the State Government. This is one of the safest investment options.

H

Hybrid funds

These are funds which invest in both equities as well as debt instruments. For this reason, they are less risky than equity funds, but more than debt funds.

I

Investment Company

A mutual fund is registered with SEBI as an investment company. This is the corporation or trust that invests the funds collected from investors on their behalf across securities.

Issuer

This is the organization that issues debt-market securities like bonds, commercial papers and certificate of deposits. It could be a company, a government organization or the government itself.

Interest Frequency

The frequency at which the interest payments occur based on the fixed interest rate of the bond.

IRR

This stands for Internal Rate of Return. It is used to calculate cash flows from an investment to evaluate profitability.

Investment diversification

This is the discipline and practice of investing your monies into different asset classes like equity, debt etc. so that your exposure to any one type of asset is limited.

Indexation

This is when the cost of a mutual fund is calculated after taking inflation into consideration.

Investment Objective

Every mutual fund has a goal, which it aims to achieve on behalf of its investors. It could be capital appreciation – profits – in the long-term or distributing regular fixed income. This goal is called your investment objective.

Indenture

This is a contract associated with a bond that provided details on the terms, clauses and other relevant information.

K

KYC in Mutual funds

Know Your Customer is a compliance that is a prerequisite for mutual funds. They include KYC forms and proofs of identity and address.

KYC

‘Know your customers’ or KYC is a Reserve Bank of India guideline for financial institutions functioning on Indian soil under which they have to maintain updated documents for all account holders.

L

LTCG tax

This is Long Term Capital Gains Tax. This is a tax levied on gains from mutual funds that have been held for over a specified period of time.

Liquidity

This is the amount of cash that a mutual fund can disperse to its investors in case they want to redeem their mutual fund units.

Load

This is the amount a mutual fund charges investors for various reasons. There are different kinds of loads – management fees, entry or front-end loads, exit loads.

M

Maturity

The maturity term of a bond is the time period during which the investor receives interest payments on the investment.

Market risk

Sometimes, unexpected occurrences change the outlook for an industry/company completely and catch you off-guard. The ability of such events to induce a divergence from the expected performance of a company. This is called risk.

Maturity date

The date on which the contract of the investment comes to an end and benefits are payable.

Money market

Money market is a market of liquid instruments with an aim to provide easy liquidity, preservation of capital, and moderate income. These include short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, and government securities.

Mutual fund SIP

A systematic investment plan (SIP) helps you spread your investment over time through fixed payments either on a monthly or quarterly basis. This also helps inject discipline into your investment habit.

Mutual fund units

Units are an individual’s holdings in a mutual fund and represent the lowest level of ownership.

Municipal bonds

These are bonds issued by local authorities like municipalities. For instance, your city/town’s municipality can borrow money by issuing these bonds.

Management Fees

The amount paid to your fund manager for his expertise and portfolio management skills is called management fees.

N

New Fund Offering (NFO)

When a stock gets listed on the exchange, it comes up with an IPO or Initial Public Offering. Similarly, when a mutual fund starts a new scheme and invites investors to put in money in exchange for units, it is called a New Fund Offering or NFO.

NFO

NAV

Net Asset Value (NAV)

Net Asset Value is the market value of all the securities held by the scheme. It is measured on a per-unit basis. NAV is calculated by dividing the total net assets by the total number of units issued. Total net assets is the market value of all the assets a mutual fund holds, less any liabilities, as of a certain date.

O

Offer document

Offer document is a prospectus in case of an IPO (Initial Public Offering) or offer for sale (OFS) or a rights issue,

P

Prospectus

Every mutual fund is supposed to give details about its company, the investment objectives of the fund, the risks it perceives, services offered as well as fees. This official document is called the prospectus.

Passive funds

This includes exchange-traded funds (ETF), index funds, and commodity funds. Passive mutual funds only track the movement of an underlying asset. Index funds track a particular index like Sensex or Nifty 50.

Payout

This is the amount of expected financial returns from investments.

PE Ratio

This is called the price-to-earnings ratio. It is used to value a company by measuring its current share price relative to its earnings per share.

Primary market

In the primary market, companies get listed through an Initial Public Offering. Thus, new securities are available in the primary market.

Par value

This is the amount that the issuer promises to pay the bondholder at the maturity date of the bond.

Premium

This is the amount investors are willing to pay over the face value of the bond.

Portfolio

This is the collection of assets owned by the mutual fund or even you as an individual. It includes all the financial instruments invested in like stocks, bonds, and other securities.

R

Redeem

There are two ways to exit a mutual fund – sell it to another investor or back to the fund. The latter is called ‘redeeming’. Once an investor redeems his or her lot of MF units, the NAV of the fund changes. This is because the total number of units issued to investors differs.

Risk/Return Trade-off

Risk is simply the degree of fluctuation in your asset’s price. A high risk is when the asset’s price changes a lot. It could be on the higher side or on the lower side. For this reason, it is believed that high return is possible only if you take a great risk. Similarly, if you are not willing to take a high risk, you must be satisfied with low returns.

Revenue bond

This is a type of municipality bond where the returns are based on a project, like a bridge or toll.

Risk tolerance

This is the ability of an investor to hold on while the value of their investment falls. The higher the risk, the higher the return and vice versa.

Rupee-cost Averaging

Every day, values of financial assets change. So, when you buy at two different times, your purchase/market price will differ. For example, today you buy 10 units at Rs 100 each. Tomorrow, you may buy another 10 units for Rs 120 each. Your average price of the 20 units will be Rs 110 – the average. So, when you finally sell the units for Rs 150, your profit will be Rs 40/unit. This is called rupee-cost averaging.

S

Secondary market

In the secondary market, investors buy or sell securities, which have already been issued.

Security

Security is another name given to a financial asset, like a bond, that can be traded in the open market

STP

Systematic Transfer Plan (STP) is a tool provided by Mutual Funds that help transfer money automatically between two schemes at a predefined frequency.

T

Total Return

This is the total amount of profits an investor makes keeping in mind the dividends, capital gains from selling units, distribution of fund income as well as returns earned on reinvestments.

X

XIRR

XIRR stands for Extended Internal Rate of Return. It is used to calculate returns on investments where many transactions occur at different times. These include instalments like SIPs and redemptions as well. XIRR gives you the real investment return.

Y

Yield

The amount of returns that you get from a bond is called the yield.

Z

Zero coupon bonds

These are bonds which have zero returns, i.e. they don’t pay any interest to the bondholders.