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MF Glossary

Some of the commonly used terms in the industry are explained here.

Advisor

Your financial consultant who gives professional advice on the fund’s investments and to supervise the management of its assets.

Amortization

A method of equated monthly payments over the life of a loan. Payments usually are paid monthly but can be paid annually, quarterly, or on any other schedule. In the early part of a loan, repayment of interest is higher than that of principal. This relationship is reversed at the end of the loan.

Appreciation

When an investment increases in value, it appreciates. For example, a equity share whose price goes from Rs. 20/- to Rs. 25/- has appreciated by Rs. 5/-.

Arbitrage

The practice of buying and selling an interlisted stock on different exchanges in order to profit from minute differences in price between the two markets.

Asset

Property and resources, such as cash and investments, comprise a person’s assets; i.e., anything that has value and can be traded. Examples include stocks, bonds, real estate, bank accounts, and jewellery.

Asset Allocation

When you divide your money among various types of investments, such as stocks, bonds, and short-term investments (also known as “instruments”), you are allocating your assets. The way in which your money is divided is called your asset allocation.

Asked or Offering Price

The price at which a mutual fund’s shares can be purchased. The asked or offering price means the current net asset value (NAV) per share plus sales charge, if any. For a no-load fund, the asked price is the same as the NAV.

Asset Allocation Fund

A fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, gold bullion and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.

Automatic Reinvestment

A service offered by most mutual funds whereby income, dividends and capital gain distributions are automatically invested into the fund by buying additional shares and thus building up holdings through the effects of compounding.

Annualised Return

This is the hypothetical rate of return, that, if the fund achieved it over a year’s time, would produce the same cumulative total return if the fund performed consistently over the entire period. A total return is expressed in a percentage and tells you how much money you have earned or lost on an investment over time, assuming that all dividends and capital gains are reinvested.

Balance Sheet

A financial statement showing the nature and amount of a company’s assets, liabilities and shareholders’ equity.

Balanced Fund

A mutual fund that maintains a balanced portfolio, generally 40% bonds and 60% equity.

Barter

The exchange of goods and services for other goods and services without the use of money.

Basis Point

A phrase used to describe differences in bond yields, with one basis point representing one-hundredth of a percentage point. Thus if Bond X yields 8.5 per cent and Bond Y 8.75 per cent, the difference is 25 basis points.

Bid or Sell Price

The price at which a mutual fund’s shares are redeemed (bought back) by the fund. The bid or redemption price means the current net asset value per share, less any redemption fee or back-end load.

Blue Chip

A share in a large, safe, prestigious company, of the highest class among stockmarket investments. A blue-chip company would be called thus by being well-known, having a large paid-up capital, a good track record of dividend payments and skilled management.

Board of Directors

A committee elected by the shareholders of a company, empowered to act on their behalf in the management of company affairs. Directors are normally elected each year at the annual meeting.

Bond/Income Fund

A mutual fund whose portfolio consists primarily of corporate and government securities. These funds generally emphasize income rather than growth.

Bond Rating

System of evaluating the probability of whether a bond issuer will default. CRISIL, ICRA, CARE and other rating agencies, analyze the financial stability of both corporate and state government debt issuers. Ratings range from AAA (extremely unlikely to default) to D (likely to default). Mutual funds generally restrict their bond purchases to issues of certain quality ratings, which are specified in their prospectuses.

Capital

This is the amount of money you have invested. When your investing objective is capital preservation, your priority is trying not to lose any money. When your investing objective is capital growth, your priority is trying to make your initial investment grow in value.

Capital Appreciation Fund

A mutual fund that seeks maximum capital appreciation through the use of investment techniques involving greater than ordinary risk, such as borrowing money in order to provide leverage and high portfolio turnover.

Capital Gain

Profit from a sale of an investment constitutes a capital gain. For example, if you bought a share of stock for Rs. 5/- and later sold it for Rs. 7/-, you would have a capital gain of Rs. 2/-.

Capital Gains Distributions

Payments (usually annually) to mutual fund shareholders of gains realized on the sale of portfolio securities.

Capital Growth

A rise in market value of a mutual fund’s securities, reflected in its NAV per share. This is a specific long-term objective of many mutual funds.

Certificate of Deposit

Interest-bearing, short-term debt instrument mainly issued by Financial institutions.

Closed-ended Mutual Fund

A mutual fund that offers a limited number of shares. They are traded in the securities markets. Price is determined by supply and demand. Unlike open-ended mutual funds, closed-ended funds do not redeem their shares.

Collateral Security

This is extra security provided by a borrower to back up his/her intention to repay a loan.

Commercial Paper

Short-term, unsecured promissory notes with maturities shorter than 3 months. They are issued by corporations to fund short-term credit needs.

Commission

The broker’s or agent’s fee for buying or selling securities for a client. The fee is usually based on a percentage of the transaction’s market value.

Compounding

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, money has the potential to grow much faster.

Consideration

The ‘consideration’ is the total purchase or sale amount associated with a transaction. The amount you ‘pay’ or ‘receive’. It may also be the basis for working out the commission, taxes and any other charges you are asked to pay.

Conversion Priviledge

See Exchange Priviledge

Custodian

The bank or trust company that maintains a mutual fund’s assets, including its portfolio of securities or some record of them. Provides safekeeping of securities but has no role in portfolio management.

Deficit

The shortfall between government revenues and budgetary spending in any given year. A surplus occurs when annual revenues exceed expenditures.

Derivative

An investment contract based on an underlying investment called an “instrument.” The most common type of derivative is an option contract, which involves the right to buy or sell the underlying instrument at an agreed price. Futures contracts are also derivatives.

Diversification

The policy of spreading investments among a range of different securities to reduce the risks inherent in investing.

Dividend

When companies pay part of their profits to 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.

Endorsement

Assigning or transferring a lien to another person is accomplished through the use of an endorsement. The words “PAY TO THE ORDER OF” and then the name of the person to whom the lien is being assigned to, is written. If there is not enough space on the original note to write an endorsement, it is written on a separate piece of paper that is permanently affixed to the original note. This is called an allonge.

Exchange Priviledge

The right to transfer investments from one fund into another, generally within the same fund group, at nominal cost.

Ex-Dividend Date

The date on which a fund’s Net Asset Value (NAV) will fall by an amount equal to the dividend and/or capital gains distribution (although market movements may alter the fund’s closing NAV somewhat). Most publications that list closing NAVs place an “X” after a fund’s name on its Ex-Dividend Date.

Expense Ratio

The ratio of total expenses to net assets of the fund. Expenses include management fees, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund’s prospectus. Expense ratios may be a function of a fund’s size rather than of its success in controlling expenses.

Face Value

The face value is the term used to describe the value of a bond in terms of what the company which issued the bond will actually repay when the loan matures. It’s sometimes described as nominal or par value.

Fiscal Year

An accounting period consisting of 12 consecutive months.

Growth Fund

A mutual fund whose primary investment objective is long-term growth of capital. It invests principally in common stocks with significant growth potential.

Income Fund

A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Index Fund

A mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index (e.g. BSE Sensex).

Inflation

When the price of goods and services rises, the result is called inflation. This means that things you buy today at one price are likely to cost more in the future.

Institutional Investor

An institutional investor is a professional money manager whose job it is to put money into shares and other assets on behalf of private investors who entrust them with money via their pension and life insurance funds.

International Fund

A fund that invests in securities traded in markets outside India.

Investment Advisor

See Advisor

Investment Objective

The financial goal (long-term growth, current income, etc.) that an investor or a mutual fund pursues.

Issued Share Capital

This is the total number of shares a company has made publicly available multiplied by the total nominal value of the shares. A company may have 10 million shares in issue, each with a nominal value of Re. 1. So the issued share capital is Rs. 10 million.

Junk Bond

A speculative bond with higher credit risk.

Lessee

The person who makes lease payments. He has right of possession and use of a property under the terms of a lease.

Lessor

The person who receives lease payments. He leases property.

LIBOR

LIBOR stands for London Inter Bank Offer Rate. It’s the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the City of London. Money can be borrowed overnight or for a period of in excess of five years. The most often quoted rate is for three month money. ‘3 month LIBOR’ tends to be used as a yardstick for lenders involved in high value transactions. They tend to quote rates as ‘points above LIBOR’. So if 3 month LIBOR were (say) six per cent, a bank may choose to lend to another bank at (say) 6 and a quarter per cent. e.g. a quarter per cent above 3 month LIBOR.

Lien

A type of security instrument (i.e., a tax lien), placed against property, making it security for the payment of a debt, judgment, mortgage, or taxes. If the lien is not paid, the lien holder has the right to confiscate the property in order to recover the money that was loaned.

Liquidity

If you can generally buy or sell an asset quickly, or convert it to cash quickly, then that asset is considered “liquid.”

Load

A sales charge or commission assessed by certain mutual funds (“load funds”) to cover their selling costs.

Load Fund

A mutual fund that levies a sales charge, which is included in the offering price of its shares, and is sold by a broker or salesman. A front-end load is the fee charged when buying into a fund; a back-end load is the fee charged when getting out of a fund. See Redemption Fee.

Low-Load Fund

A mutual funds that charges small commission, usually 1.5% or less, for the purchase of its shares.

Management Fee

The amount that an Asset Management Company (AMC) charges for management of the fund’s portfolio. In general, this fee ranges from 0.5% to 1.25% of the fund’s asset value.

Market

A public place where the buying and selling of all types of bonds, stocks and other securities takes place. A stock exchange is a market.

Maturity

This is the length of time (term) before a debt instrument, such as a bond, is due to be repaid in full.

Money Market Fund

A mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including certificates of deposit, commercial paper, and Government securities. Money funds make these high interest securities available to the average investor seeking immediate income and high investment safety.

Mortgage

A legal instrument given by a borrower to the lender entitling the lender to take over pledged property if conditions of the loan are not met.

Net Asset Value

Also known as NAV, this is the unit price (or rupee value) of one unit of a mutual fund. NAV is calculated at the end of every business day. It is calculated by adding up the value of all the securities and cash in the mutual fund’s portfolio (its assets), subtracting the fund’s liabilities, and dividing that number by the number of units that the fund has issued. It does not include a sales charge. The NAV increases (or decreases) when the value of the mutual fund’s holdings increase (or decrease).

Net Worth

A person’s net worth is equal to the total value of all possessions, such as a house, stocks, bonds, and other securities, minus all outstanding debts, such as mortgage and revolving credit lines.

No-Load Fund

A commission-free mutual fund that sells its units at NAV, either directly to the public or through an affiliated distributor, without the addition of a sales charge.

Offer Document

See Prospectus

Option

A device used to speculate or hedge in securities markets. Buying a “call” option gives an investor the right to buy 100 shares of a stock at a certain price within a specified time; buying a “put” option allows an investor to sell a stock under the same conditions.

Premium

A bond premium is the amount by which a bond sells above its par (face) value. For insurance, the premium is the amount you pay for your insurance policy.

Price/Earnings Ratio

This is the price of a stock divided by its earnings per share. This ratio gives an investor an idea of how much they are paying for a particular company’s earning power. A trailing P/E refers to a ratio that is based on earnings from the latest year, while a forward P/E uses an analyst’s forecast of next year’s earnings. For instance, a stock selling for Rs. 20 a share that earned Re. 1 last year has a trailing P/E of 20. If the same stock has projected earnings of Rs. 2 next year, then it has a forward P/E of 10.

Price Stability

Price stability protects the original amount you put into an investment. A mutual fund’s price stability is seen in changes in its net asset value over time.

Prospectus

An official document that each investment company must publish, describing the mutual fund and offering its shares for sale. It contains information that has been mandatorily required by SEBI.

Rate of Return

The total proceeds derived from the investment per rupee initially invested. Proceeds must be defined broadly to include both cash distributions and capital gains. The rate of return is expressed as a percentage.

Record Date

The date the fund determines who its unitholders are; “unitholders of record” who will receive the fund’s income dividend and/or net capital gains distribution.

Redeemable

Preferred shares or bonds that give the issuing corporation an option to repurchase securities at a stated price. These are also known as callable securities.

Redemption Fee

A fee charged by a limited number of funds for redeeming, or buying back, fund units.

Redemption Price

The price at which a mutual fund’s units are redeemed (bought back) by the fund. The redemption price is usually equal to the current NAV per unit.

Regional Fund

A mutual fund that concentrates its investments within a specific geographic area, usually the fund’s local region. The objective is to take advantage of regional growth potential before the national investment community does.

Registrar

See Transfer Agents

Reinvestment Date

The date on which a share’s dividend and/or capital gains will be reinvested (if requested) in additional fund shares.

Reinvestment Privilege

A service that most mutual funds offer whereby a shareholder’s income dividends and capital gains distributions are automatically reinvested in additional shares. See Automatic Reinvestment.

Rupee Cost Averaging ( SIP)

The technique of investing a fixed sum at regular intervals regardless of stock market movements. This reduces average share costs to the investor, who acquires more shares in periods of lower securities prices and fewer shares in periods of high prices. In this way, investment risk is spread over time.

Sector Fund

A fund that operates several specialized industries sectors portfolios under one umbrella. These sectors could be FMCG or Technology.

Securities

This is another word for stocks, bonds, and short-term investments.

Securitization

A process under which non-marketable assets, such as mortgages, automobile leases and credit card receivables, are converted into marketable securities that can be traded among investors.

Specialty Fund (See Sector Fund)

A mutual fund specializing in the securities of a particular industry or group of industries or special types of securities.

Spread

The difference between the rates at which money is deposited in a financial institution and the higher rates at which the money is lent out. Also, the difference between the bid and ask price for a security.

Subsidy

A financial contribution by government (including any form of income or price support) that also confers a benefit to the recipient (i.e., producers of goods or services or buyers of goods). Many types of government practices constitute a financial contribution, including traditional forms of subsidies such as grants and loans, as well as foregone revenues such as tax credits.

Systematic Investment Plan

Many mutual funds offer investment programs whereby unitholders can invest. The Unitholders of the scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. The SIP allows the investors to invest a fixed amount of Rupees every month or quarter for purchasing additional units of the scheme at NAV based prices.

Systematic Withdrawal Plans

Many mutual funds offer withdrawal programs whereby unitholders receive payments from their investments. These payments are usually drawn from the fund’s dividend income and capital gain distributions, if any, and from principal only when necessary.

Total Return

The performance of an investment, including yield (dividends, interest, capital gains) as well as changes in per unit price, calculated over a designated period of time. Assuming reinvestment of capital gains and income distributions, multiply the number of units owned by the net asset value per unit. Subtract the original investment from the result. Then divide that figure by the original investment and multiply by 100. (Assuming your units are now worth Rs. 8,000 and the investment was Rs. 5,000/-, divide Rs. 3,000/- by Rs. 5,000/- getting 0.6. Multiplied by 100-percentage increase, or total return, was 60%.) Also see Yield.

Trade Date

The actual date on which your shares were purchased or sold. The transaction price is determined by the closing Net Asset Value on that date.

Transfer Agent (also Registrar)

The organization that mutual funds employ to prepare and maintain records relating to unitholder accounts. Some mutual fund groups operate in-house transfer agencies.

Trustee

One designated to hold property for another, pending the performance of an obligation. In a deed of trust state, the trustee is often the title company that handled the property sale closing.

Underwriter

The organization that acts as the distributor of a mutual fund’s units to broker/dealers and the public.

Vertical Integration

This is where a company merges or takes over other companies in the same supply chain. If a shoe manufacturer, takes over his supplier it would be vertical integration.

Volatility

In investing, volatility refers to the ups and downs of the price of an investment. The greater the ups and downs, the more volatile the investment.

Voluntary Plan

A flexible plan for capital accumulation, involving no specified time frame or total sum to be invested.

Yield

Income or return received from an investment, usually expressed as a percentage of market prices, over a designated period. For a mutual fund, yield is interest or dividend before any gain or loss in the price per share. See Total Return.

Zero Coupon Bond

Bond sold at a fraction of its face value. It appreciates gradually, but no periodic interest payments are made. Earnings accumulate until maturity, when the bond is redeemable at full face value.

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