Here is an exhaustive list of frequently used terms associated with mutual funds and what they mean:-
Absolute Return refers to the net yield or income that you earn from investing in an asset over a certain time period. It is mentioned as a percentage and takes into account the gains as well as losses.
For example, if you invest Rs. 5,000 in a Mutual Fund today and five years down the line, you receive Rs. 6,000, then the absolute return is 20%.
Difference between the (invested amount and current value) / The amount of investment
An Account Statement contains the details of all the transactions related to an account for a specified time period. It can be for a particular month, quarter or a year. Account statements contain information such as the opening balance, debits (or payments), credits (receipts) and the closing balance. A common example is a statement issued by banks to their customers.
For example, Asset Management Companies, i.e. AMCs give an Account Statement to their customers with a record of all the transactions within that period, units, transaction date, folio details, Fund Name, etc. for your record. The statement is generated at the duration requested, i.e. if you need monthly statements, the same is sent to you, either in hard copy or via email, as desired.
Alpha indicates the additional or excess return that you earn from an investment when compared to the average or a benchmark. So, alpha is the excess return that the fund manager manages to generate from your investment as compared to the underlying benchmark return.
For example, if you have invested in a mutual fund which gives an annualized return of 15% as compared to a benchmark return of 11% by the underlying benchmark, say NIFTY, then 4% (15% – 11%) is your alpha return.
The term annualize means to project a yearly outcome on the basis of the current performance. The annualized return is just an extrapolated data of the particular tenure that is mentioned.
For example, if a particular asset has given a return of 5% in a period of 3 months, then the annualized return is 20%.
(Current Return/ Time period in which the mentioned returns have been achieved) *12
Arbitrage Funds are mutual funds which capitalize on the price difference for the same security or asset across various markets such as cash and derivatives (or even across the stock exchanges). There are dedicated specialists called Fund Managers who handle these funds.
For example, a fund manager can buy a particular stock from the derivatives market at Rs 110 and then sell the same stock in the cash market at Rs 120. In this process, the investor earns Rs. 10 per stock. The difference in the price is the arbitrage spread and a fund which takes advantage of the price difference of the two is called an Arbitrage Fund.
Asset Allocation refers to the process through which an investor decides how to apportion the total investable amount in different asset categories according to his risk profile. Investors can choose from a wide range of categories such as equity mutual funds, debt based mutual funds, gold, real estate, cash etc. Factors such as age, lifestyle, financial goals and risk appetite of the investor play an important role in asset allocation. A well-designed asset allocation plan helps to minimize the risk of the overall portfolio.
For example, a moderate investor in early 30s might have 30% equity, 40% debt and 30% in real estate and gold as his asset allocation requirements. He would then have to balance his portfolio according to his asset allocation so that it is as close to his desired Asset Allocation as possible.
A balanced fund which allows the investors to have a mix of various asset categories in the investment portfolio is called an Asset Allocation Fund. The fund manager takes all the necessary decisions for the Asset Allocation according to the investment objective of the fund.
The common asset categories include stocks (domestic and foreign), bonds, real estate and cash equivalents. Some of these funds fix the asset allocation amongst the various asset classes while others give the flexibility to the investor to make changes in the proportions basis the market conditions.
Dynamic Asset Allocation Fundwhere the proportion of allocation in equity and debt changes as per the market fluctuations.
Static Asset Allocation Fundwhere the proportion of allocation in equity and debt is predetermined and remains the same, irrespective of the market fluctuations.
An Asset Allocation Fund follows equity taxation with at least 65% exposure in equity.
An Asset Management Company is a fund house which manages a pool of funds (collected from investors) with the objective of maximizing the returns. It designs diversified portfolios and invests across multiple asset categories such as stocks, bonds, etc. Investors benefit from the professional expertise of such companies and are able to get exposure to a well-designed and diversified portfolio of funds. The AMCs float the mutual funds for investors to invest.
For example, HDFC Asset Management Company has multiple mutual funds for investors to buy like HDFC Equity Fund, HDFC Top 100 Fund, HDFC Income Fund, HDFC TaxSaver Fund, etc. Likewise, other AMCs like Franklin Templeton Asset Management Company has various funds like Franklin India Bluechip Fund, Franklin India Prima Fund, Franklin India Prima Plus Fund, etc.
Assets Under Management or AUM is the cumulative market value of all investments managed by a portfolio manager, a mutual fund company or any other such financial institution.
For example, when you invest in a particular mutual fund, there would be other individuals or investors who would put their money into that fund as well. So, when you add all the amount invested in that mutual fund, you arrive at its Assets Under Management. AUM is taken as the yardstick to measure the quantum and success of a fund house.
The AUM is calculated for each and every fund and for each and every fund house as well. So, one can easily check the performance of a fund with its AUM across its peers.
For example, the AUM of a particular fund is mentioned as Assets Under Management= Rs ABC crores (As on Date DD-MM-YYYY)
Balanced Fund is a hybrid fund which splits the total invested amount between equity and debt in a pre-determined and fixed proportion. Some of these funds might have a clause to cross the pre-determined limits by a certain margin basis the market dynamics. In some funds, the fund manager invests as per their discretion and the market movements keeping the investment objective in mind.
These funds are a perfect choice for investors who want capital appreciation but only want a limited degree of risk. Mutual Funds and ULIPs both offer balanced funds.
Balanced Mutual Funds usually have at least 65% exposure in equity to have equity taxation. The fixed income portion in Balanced Funds helps investors mitigate the equity related risks.
A market is referred to be bearish or a bear market when the price of securities is in a declining mode. It is usually regarded that a fall of more than 20% in the security prices for a continuous period of two months indicates a bear market.
A bear market is usually followed by a lot of stock selling as people fear that the prices might go down even more. If a bear market continues for a very long period of time, it might lead to an economic depression. The opposite of a bear market is called a bull market.
Benchmark refers to the standard or yardstick against which the performance of other securities or mutual funds is measured. As per the SEBI guidelines, all fund houses need to mandatorily declare their benchmark index. If a mutual fund delivers a higher return than its benchmark, then it is said to have out-performed. Otherwise, it is a case of under-performance.
They are generally market indices such as Nifty or Sensex. Other benchmarks could be CNX Midcap, CNX Smallcap, etc.
Out-performance of a particular fund= when the fund performs benchmarked index
Under-performance of a particular fund= when the fund performs benchmarked index
Beta is used to measure the degree of risk or volatility associated with a fund, stock or portfolio as compared to the overall market or a particular benchmark.
The beta value of less than 1= The fund or stock is less risky than the market.
The beta value of more than 1= The fluctuations in the stock value is higher than the market.
For example, if the beta is 1.2 and the market moves by 10%, then the stock in question will move by 12%.
These are shares of large, reputed and well-established companies that have a long history of strong financial performance. These companies are known in the market for robust investment strategies, continuous dividend payouts and industry dominance.
Blue Chip stocks are more resilient in nature and are generally able to sustain even in volatile or tough market conditions. These stocks are priced at a premium in the market as the return expectation is also higher.
Examples of some bluechip stocks in India are Tata Consultancy Services, Reliance Industries, ITC Limited, HDFC Bank, Coal India, etc.
Mutual Funds which invest in Blue Chip stocks are known as a Blue Chip Fund or a Growth Fund.
A Bond is an I.O.U or in other words an instrument of indebtedness. It is a fixed-income instrument that depicts that the investor has lent money to the issuer of the bond.
Bonds are generally issued either by the government or corporate entities to raise money. It has an end or maturity date when the principal loan amount becomes payable to the investor. Bond investors either receive interest (called coupon rate) or earn returns when the bond is issued at a price which is lesser than the face value. Thus, they are debt certificates with a fixed interest and a specific maturity date.
For example, in India, there are 6 types of Bonds, namely: Public Sector Bonds, Tax Savings Bonds, High Yield Bonds, Government Bonds, Municipal Bonds and Corporate Bonds.
Bond Fund refers to those mutual funds which invest money primarily in bonds and other debt securities. The fund manager is tasked with the responsibility of generating a steady stream of income for the investors by investing in categories such as GSecs(Government Securities), bonds, debentures, etc.
These funds generally pay dividends on a periodic basis in addition to some capital appreciation. Bond Funds are offered by Mutual Funds, ULIPs and other such investment firms. There are various types of bond funds such as short-term investments, medium to long-term investments, government securities, etc.
A bond fund has debt taxation and an investor gets indexation benefit for being invested for a period of minimum 3 years.
The Bombay Stock Exchange (BSE) Index comprises of 30 of the largest, well-performing and financially strong listed companies. It is calculated on the free-float capitalization method and is an indicator of the countrys economic scenario and market sentiments. This is the oldest and one of the most commonly referred benchmark index of India.
The S&P BSE Index is commonly known as the Sensex or the Sensitive Index. It comprises of Indias 30 most traded companies and measures their price-sensitive indices. The base value of the Sensex was considered to be 100 on April 1, 1979, and has been published thereafter.
When the majority of the share prices in the markets are rising, it is said to be a bull market. Such a market is characterized by investor optimism and confidence and higher return expectation.
A market which is in a bullish mood encourages investors to put their money into stocks and leads to a lot of buying in the market. This trend can last for a couple of months or even across multiple years. The opposite of a bull market is a bear market.
Compound Annual Growth Rate (CAGR) is the average rate of returns that an investor earns from the money invested over a certain period of time. Absolute returns do not take into consideration an important factor time value of money.
CAGR includes this factor in its calculation and is considered a more holistic statistic. This is an important parameter to consider while making any investment decision such as mutual funds. It enables an investor to compare various schemes across different time periods.
Capital gain refers to the profit that you make from selling an asset such as investment, mutual funds or property. It is calculated as the difference between the amount invested and the sale value of the asset.
There are two types of capital gains: short- term and long-term.
Short-term capital gains (STCG) are for assets which you have held for a period lesser than:
One year for equity investments like equity mutual funds, stocks, etc.̥
Long-term capital gains (LTCG) are for assets which you have held for a period more than:̥
One year for equity investments like equity mutual funds, stocks, etc.
For capital gains, STCG or LTCG, taxation applies to the products for their duration of the investment.
For example, if an equity or stock investment is redeemed within one year of its purchase, then the difference between the sale price and the purchase price for the specific number of units would be considered as STCG and would be taxed accordingly.
As per the Income Tax Regulations, the tax applicable on capital gains needs to be filed in the same year as the same. The details of the capital gains earned by an investor are available in a document called the Capital Gains Statement. It is an important document to understand the investors tax liability.
The Capital Gains statement can be taken from the concerned fund house where the funds were invested. They are also available with the R&T Agents such as CAMs, Franklin and Karvy.
This statement gives details about short-term and long-term capital gains for each and every product as well as its tax implications.
The tax that is levied on the capital gains is referred to as Capital Gains Tax. Capital Gains are the earnings or profits that one earns from the sale of certain specific assets or investments. The tax rates depend on whether the assets or investments were classified as short-term or long term and whether it is in equity or debt or any other asset class.
Capital Gains tax applies to capital assets like:
Certificate of Deposit is a kind of money market instrument that is issued by banks and specific other non-banking financial institutions such as IFCI, etc. against the funds that are deposited with them. They are short-term securities which have a pre-defined rate of interest and are issued for a specific tenure.
CDs can be issued to corporations, individuals, funds, trusts, associations etc. The Reserve Bank of India releases guidelines regarding CDs from time to time.
Close-Ended schemes are mutual funds wherein investors can enter only at the time of NFO (New Fund Offer). They have a predetermined maturity period, after which the scheme can either become open-ended or payback the investors as per the applicable NAV.
Units under this scheme are usually listed on the stock market after the initial issue period of the NFO.
Commercial Paper is an unsecured, short-term, money market instrument which was introduced in the year 1990. It is issued through a promissory note.
This instrument enables the issuers to diversify their sources of short-term money borrowing. Corporates, primary dealers and financial institutions which meet the eligibility criteria can issue commercial papers in India.
The maturity period for Commercial Paper ranges between seven days to one year from the date of issuance.
Convertible debentures are a kind of debt securities or loan which have the option to convert into equity shares or stock after the completion of a certain time period.
Usually, the right of conversion lies solely with the holder. However, under some special circumstances, even the issuer can exercise this option.
There are two types of convertible debentures:
When someone invests in bonds, they are assured of a fixed rate of interest, irrespective of the market conditions. This rate of interest or yield is called the coupon rate.
The coupon rate is calculated on the face or par value of the bond.
For example, if you purchased a 10-year Rs 3000 bond with a coupon rate of 10%, then you will receive Rs. 300 (i.e. 10% of 3000) every year for the duration of 10 years.
At the time of buying or selling mutual funds, one needs to take into consideration the applicable Net Asset Value (NAV). The NAV allotment is dependent on the time of application and fund submission. This time is referred to as the cut-off time.
The cut-off time varies for debt, equity and liquid funds.
For instance, in the case of liquid funds, the cut-off time is 2 pm. If someone invests in a liquid fund any time before this cut-off time, they will be allotted the NAV of the previous day.
If the application is submitted after 2 pm, then the NAV of the current day is applicable.
The Turn-Around-Time (TAT) for the redemption amount to be credited, the transaction date is of utmost importance and the cut-off time decides the same.
Debentures are a type of debt-instrument with a long term horizon. They are unsecured in nature as there are no collaterals, liens or hypothecation. It allows the issuer to borrow funds from the public.
The debenture holders are treated as creditors for the company issuing the debenture. Debentures have a pre-defined maturity period and also state in the beginning the mode of interest payment to the holders.
There can be different categories of debentures depending upon their convertibility, security, redemption and registration.
Debt is giving a loan to someone for a specific time at a predefined rate. So, mutual funds which invest in fixed income debt instruments are called Debt Funds. Thus, Debt Funds refer to those mutual funds which invest majorly in debt based or fixed-income securities, like government securities, Treasury Bills, Gilt Funds, corporate bonds, etc.
Debt or Income Funds typically have a 100% exposure in debt. However, hybrid funds with more than 35% exposure in debt instruments also follow debt taxation and can be called Debt Funds, like MIP(Monthly Income Plan).
Usually, Debt Funds have a predetermined maturity date and offer investors fixed interest. Investors of such funds have two sources of earnings:
2.Appreciation in capital due to market dynamics.̥
In Direct Plans, investors can directly invest in the fund from the fund house or the AMC. They need not go through any distributor or agent. As a result, investors can save on distribution fees that are paid out to the intermediaries.
As compared to regular plans, the expense ratio for direct plans is lower. For investors who are well-versed with the market and can choose and track their funds, direct plans offer a higher return.
P.S Goalwise now offers goal-based investing indirect mutual fundsfree of cost
Distributor refers to an intermediary between the investor and the issuer. He or she can be an individual or an entity and seeks to facilitate the process of buying and selling of stock, mutual funds or any other investment instrument.
Distributors act as an advisor who analyzes the investors financial goals and risk profile and then suggests them the most appropriate investment option. They earn a commission or fee for enabling such transactions.
Diversification follows the principle of not putting all your eggs in one basket. It is the process of investing in different securities and asset categories in order to minimize the overall risk involved. With this practice, the poor performance of one stock, sector or asset class does not significantly damage the total portfolios performance.
Diversification can be done across asset classes or even with asset classes with market capitalization. It can be done by the fund manager of a diversified mutual fund keeping the investment objective in place or by the investor as well.
Dividend Distribution Tax or DDT is the tax rate levied by the Indian government under section 1150 on domestic firms that issue a dividend to the investors. The DDT is applied on the grossed-up value of dividend declared and paid before the same is distributed to the investors.
Debt Mutual Funds at a rate of 25% + surcharge and cess, 29.12%̥
Equity Oriented Mutual Funds at a rate of 10% + surcharge and cess, i.e. 11.648%̥
The DDT is paid by the AMC before paying out the dividend to the investor. So, the dividend is exempted from tax in the hands of the investor.̥
DDT is applicable for both dividend payout and dividend reinvestment options.̥
Most mutual funds have 3 types of investment options- Dividend Payout, Dividend Reinvestment and Growth.
The Dividend Payout option is also called Dividend Plan. Thus, in a Dividend Plan, the fund pays out a portion of the investment to the investor in the form of dividends, that are declared by the Mutual Fund from time to time.
Both equity as well as debt plans offer dividend to the investor from the portion of realised profit of the investment corpus. Dividend Distribution Tax is applicable for dividend payouts.
Lots of people opt for dividend option in their investment portfolio to receive interim cash flow in their portfolio. It is important to note that dividends are not guaranteed in dividend plans.
Most mutual funds have 3 types of investment options- Dividend Payout, Dividend Reinvestment and Growth.
In a Dividend payout plan, the mutual fund pays out a portion of the investment to the investor in the form of dividends that are declared by the Mutual Fund from time to time. So, when this dividend is not paid out to the investor but is reinvested in the fund by way of buying fresh units at the current NAV is called Dividend Reinvestment.
Both equity as well as debt plans offer dividend to the investor from the portion of realised profit of the investment corpus. Also note that dividends are not guaranteed in dividend plans.
Dividends refer to a pay out which is paid by a company to its stockholders from the earnings or profits. Though mostly they are distributed in the form of cash, sometimes dividends can also be given in the form of shares etc.
Dividend is declared as a percentage of the face value of the shares.
For example, if a company declares 50% dividend and the face value of its share is Rs. 10, the amount of dividend per share owned is Rs 5. Usually companies declare dividend on an annual basis.
A Consolidated Account Statement collates the details of all holdings and transactions of an investor across depository accounts (NSDL, CDSL) and mutual funds in a single document. It includes details of all dealings including purchase, sale as well as switch made by the investor in a particular month.
Consolidated Account Statement in a digital form is called as Electronic Consolidated Account Statement (eCAS) and investors can now choose to receive it through email instead of physical post.
Erstwhile, some mutual Fund investors needed to pay a fee to the company when they join a particular mutual fund scheme. Thus, the amount charged at the time of joining or entering a scheme is called as the Entry Load. Mutual Fund companies used to charge this amount to cover for distribution expenses.
As per the SEBI guidelines released in 2009, no entry load is applicable if the investor joins the scheme directly without any distributor. However, if the investor joins a scheme through a distributor or a broker, the investor can be charged for the advice. However, there will be no charge for entering a scheme by an AMC as Entry Load!
AnEquity Linked Savings Scheme(ELSS) is a open-ended and diversified equity mutual fund which offers tax savings to its investors upto Rs 1.5 lakhs per annum. In fact, it is the only mutual fund available for a tax deduction U/S 80C.
Prior to Budget 2018, ELSS funds were completely tax free. However, from January 31st, 2018, there is a 10% tax on the long-term capital gains in excess of Rs 1 lakh per annum, without indexation benefit.
ELSS funds have a lock-in period of three years. Like other equity based mutual funds, ELSS investors can choose between dividend or growth option.
Equity Funds are a type a mutual funds which primarily invests in equity and stocks. Equity funds have an investment objective of high growth. They are categorized into different market capitalizations, like:
Large cap funds, which primarily invests in companies with a large market capitalization
Mid cap funds, which primarily invests in companies with a medium market capitalization
Small cap funds, which primarily invests in companies with small market capitalization
Micro cap funds, which primarily invests in companies which are very small
Multi cap funds, which invests in companies of various market capitalizations
Exchange Traded Funds or ETFs is a marketable security which is traded in the stock market. It consists of a portfolio of stocks which is similar to the composition of market indices such as BSE Sensex, CNX Nifty, etc. The trading value of an ETF is dependent on theNAV (Net Asset Value)of its underlying stock. They were first launched in the year 2001 in India.
Mutual Fund houses collect a fee from the investors at the time of joining or leaving a scheme. This fee is referred to as a load and the amount charged while exiting a scheme is called as theExit Load.
The objective behind this charge is to dissuade the investors from making frequent withdrawals or discourage them from exiting a mutual fund. Exit Load is expressed as a percentage and is calculated on the NAV applicable on the day of transaction.
For example, some funds have an exit load for exiting a scheme within one year of its purchase.
Expense Ratio refers to the amount charged by an investment house to manage the investors portfolio. It is also known as ManagementExpense Ratio(MER).
The amount collected as expense ratio is used for various operations expenses such as legal fees, administration and management costs, advertising related expenses etc. Expense Ratio is calculated by dividing the total expenses of the fund by the Assets under Management(AUM). The Expense Ratio is expressed as a percentage.
For example, if you have invested Rs 1 lakh in Mutual Funds and the expense ratio is 1%, then you need to pay Rs 1,000 to the investment house.
Face Value refers to the value as printed or mentioned on the face of an investment, or security certificate. It is the nominal value of a share. It is also called as the par value. The face value of a share does not change unless the issuer decides to split the stock. Dividend payouts to investors is calculated on the face value.
First-In, First-Out is a way of asset management and inventory valuation. In the parlance of stock or mutual fund transactions, it implies that at the time of a sale, the shares or units purchased first will be sold first. It is important to maintain a track of the date of acquisition of units, as they have a bearing on the tax obligations when sold as per FIFO.
Floating Rate Bonds are bonds that have a fluctuating interest rate. The rate of interest changes in line with the market volatility or any other such external factor. They are opposite in nature to the Fixed Rate Bonds wherein the coupon percentage remains constant throughout the entire tenure.
Indexed Bonds are an example of Floating Rate Bonds.
A folio is an account with an asset management company ( AMC) in which your investments from the AMC are held. A folio number is which is a unique identification for a folio is assigned when a mutual fund investor makes first investment with the fund.. The folio number can be used to keep track of how much money investor has placed with the fund, transaction history and contact details.
Fund Categories help in differentiating mutual funds on the basis of factors such as scheme objective, core investment criteria or features, method of funds management etc. This detailed categorization enables investors to choose the right funds or schemes as per their financial goals.
Additionally, it helps them to balance their overall portfolio by doing a proper mix and match of various funds categories.
Mutual Funds can be categorized on the basis of their:-
Equity Funds can be further categorized according to their Market capitalization like:-
A person who is tasked with the responsibility of managing the portfolio of an investment house is called as the Fund Manager. He or she oversees the buying and selling decisions for the concerned portfolio and seeks to maximize the clients wealth. One fund can be managed by a single fund manager or a team of fund managers.
Fund of Funds (FOF) refers to an investment fund scheme which invests in other investment funds.
In the context of Mutual Funds, rather than directly investing in equity or bonds, the fund manager in FOF holds a portfolio of other mutual fund schemes. It is sometimes also referred to as Umbrella Fund.
A fund manager of a