Mutual Funds Glossary

 

Adviser

Also known as "investment adviser" this is the organisation that serves as money manager for a mutual fund. The adviser is paid a fee based on the percentage of assets under management.

Annuitization

A plan for taking a periodic distribution of money during an annuity’s payout period.

Annuity

A series of periodic payments for a stipulated time frame.

Asked price

The price at which a security is offered for sale by a dealer. For a mutual fund, the asked or offering price equals the net asset value (NAV) plus any front-end load.

Asset Allocation

A systematic approach for dividing the portfolio into stocks, bonds and cash, including appropriate sub-categories. Factors such as age, investment horizon, risk tolerance, and portfolio size determine an individual's asset allocation. This strategy is designed to minimise the danger of asset-class risk.

Asset Management Company (AMC)

A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced.

Automatic reinvestment

A service available from virtually all funds, whereby your dividend and capital gains distributions can be reinvested into full and fractional shares at the prevailing NAV. A reinvestment program might offer several options.

Asset management fee

The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.

Balanced fund

A hybrid portfolio of stocks and bonds.

Bid price

The current price a dealer is willing to pay for a security. For a mutual fund the bid is usually called the redemption charge. See asked price and dealer.

Blue-chip stock

The stock of a large, well-established, high quality company.

Bond

A debt instrument that promises to pay interest (or coupon) payments and a fixed amount of principal at maturity. See zero-coupon bond.

Cash flow of a fund

Net, new unitholder’s money going into a fund. Some observers feel that portfolio enjoying consistent cash inflows have a performance edge.

Cheque-writing privilege

A service enabling investors to write cheques against their mutual fund account balances. Cheques usually must meet a certain minimum amount and the service is restricted to money-market funds. Closed-end fund

Unlike open-end funds, closed-end funds neither issue nor redeem fresh units to investors. Some closed-ended funds can be bought or sold over the stock exchange if the fund is listed, in which case the fund functions like any other stock. Else, investors have to wait till the redemption date to exit from the fund. Most listed closed-ended funds trade at discount to the NAV.

Commercial paper

A staple of money-market instruments, short-term in nature, issued by large, creditworthy corporations.

Company risk

The danger that some misfortune-such as a lawsuit, poor earnings, or the loss of a key market – will befall a company.

Compunding

Earnings on an investment's reinvested earnings. Given sufficient time, compounding can result in exponential growth of money.

Contingent deferred sales charge (or CDSC)

A back-end load imposed on an investor if he exits from the fund before a pre-determined period (say 6 months). The charges decline the longer an investor stays invested with a fund.

Country risk

The danger international investors face that a nation will suffer severe economic or political problems, or even a natural disaster. This peril is greatest with a single-country fund that invests in a smaller emerging economy.

Credit risk

The danger that the issuer of a corporate or municipal bond will experience financial difficulties causing deterioration in credit worthiness, perhaps even a default. Treasury securities are considered free of this risk.

Currency risk

The risk, faced by investors in foreign bond and stock funds, that the foreign currency (say, the US dollar) will appreciate relative to the currencies in which the securities are denominated. When that happens, the funds will realize a currency loss.

Custodian

The independent organization, often a bank, that is responsible for the handling and safekeeping of a fund’s cash and securities.

Daily dividend fund

A fund (money-market or bond) that calculates dividends daily, paying out or reinvesting the same.

Derivatives

Financial instruments based on some primary underlying asset or index such as a stock, bond, commodity, or a benchmark of stock prices. Derivative securities fluctuate up and down in tandem with the primary security. Derivatives often are leveraged, making them more volatile. They can be used to speculate as well as to reduce or control an unwanted risk. Options and futures are standardised derivatives. Others are customised to meet specific needs.

Discount

Refers to a closed-end fund trading in the market at a price below the NAV of its portfolio.

Distributor

The organisation that supplies mutual fund products to investors. The distributor may sell units to securities dealers, who then sell them to investors, or it might deal directly with the public.

Diversification

The strategy of spreading money among different securities to reduce or eliminate company or asset-class risk.

Dividend yield

The indicated annual dividend divided by the current price of an investment.

Exit load (Back-end load)

A sales charge paid when an investor sells a fund. See contingent deferred sales charge and redemption fee.

Emerging-markets fund

A fund that targets companies trading on stock exchanges in a variety of developing nations including those in Southeast Asia, Eastern Europe, and Latin America.

Entry load (Front-end load)

A sales fee charged at the time of purchase of mutual fund units. See Exit load.

Equity

A synonym for stock, the term refers to an ownership interest in a corporation.

Equity-income fund

A fund that focuses on stocks with high-dividend yields, such as utilities, real-estate, securities, and financial companies.

Ex-dividend date

Normally, one business day after the "record date". Investors purchasing unit on or after the "ex-dividend" date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.

Expense ratio

The annual expenses of a fund (at the end of the financial year), including the management fee, administrative costs, divided by the number of units on that day.

Fund house/family

A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.

Fee table

Normally mentioned in the prospectus explaining in detail the various kinds of fees charged to the unitholder and the impact of these charges over time.

Fixed annuity

A contract that generates guaranteed returns during its accumulation period and level payments during its payout period.

Flexible-bond fund

A fund that can invest in a variety of bonds and alter the mix. The manager does not face restrictions on quality or maturity.

Foreign-bond fund

A fund that invests in government and corporate debt denominated in non-U.S. currencies.

401(k) plan

A popular contribution program, available through many employers. Within these tax-sheltered plans, participants often can choose mutual funds as one or more of the investment choices.

Funds of funds

These are all-in-one funds that invest in other mutual funds.

Futures (or futures contract)

An exchange-traded contract calling for settlement on a specific asset (such as the S&P 500) at a predetermined price and time. Fund managers may hedge with futures.

Global fund

A fund that invests in companies headquartered or traded in a variety of countries, including the United States.

Growth/Equity fund

A fund holding stocks with good or improving profit prospects. The primary emphasis is on appreciation.

Growth investing

A popular investment style whereby fund managers identify companies showing promise of above-average earnings. Stocks are held primarily for price appreciation as opposed to dividend income. Growth investors often are willing to pay high multiples of earnings or book value for companies with exciting prospects.

Hedging

A general term used to describe any of several risk-reduction strategies. A fund manager might partially hedge against a market decline simply by moving a larger fraction of the portfolio into cash. Alternatively, the manager could sell stock-index futures contracts. If the market falls, the gains on the shorted futures would more or less offset the decline in the portfolio's value.

High-yield bond

Issues rated below investment grade (as evaluated by credit rating agencies). Although they often promise high income, junk bonds carry high credit risk and might be near or in default. Also known as high-yield bonds, junk securities are particularly sensitive to changes in economic conditions. See Junk bond.

Hybrid fund

A fund that holds both stocks and bonds. Also known as Balanced funds.

Income (Dividends)

Payments to unitholders made from the dividends, and interest earned on the securities held by a fund. Bond funds pay dividends more frequently than growth funds. Income distributed through dividends is distinct from returns which is the capital appreciation on investment.

Index Fund

A fund that replicates a particular market index such as the BSE Sensex/CNX Nifty by holding many if not all of the same stocks and in the same proportion as in the benchmark index. With low-cost, passively managed index funds, you're assured of doing about as well as the benchmark index.

Inflation risk

The danger that the returns from one's investments will fail to keep pace with increase in the general price level. This is a major problem with secure investments such as Treasury bills, while stocks offset this risk to a large extent.

Initial public offering (IPO)

The sale of a company's shares or a mutual fund’s scheme to investors for the first time.

Interest-rate risk

The danger that the price of a bond will fall as interest rates rise. Portfolio managers gauge a fund's interest-rate risk by calculating its duration.

Junk Bond

Issues rated below investment grade (as evaluated by credit rating agencies). Although they often promise high income, junk bonds carry high credit risk and might be near or in default. Also, known as high-yield bonds, junk securities are particularly sensitive to changes in economic conditions. See High-Yield bond.

Liquidity

The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no adverse price impact.

Liquidity risk

A danger faced by the holder of thinly traded or illiquid securities who are forced to sell a relatively large number of shares in a short period, often at an unfavourable rate. Junk bonds, small stocks and stocks traded in thin foreign markets carry this risk.

Market risk

The danger that overall stock markets could fall. Fund managers may try to deal with this risk by moving a larger percent of their portfolios into cash or by hedging with futures and options. However, market risk is not a one-way street; it's also the peril of being on the sidelines when the stock prices surge.

Money-market fund

A fund that invests in short-term debt securities such as Treasury bills and Commercial paper. As the safest of all funds, these portfolios have a stable NAV.

Mutual fund

By far the most popular type of investment company. A diversified and professionally managed fund, the mutual fund stands issues fresh units to incoming investors at NAV plus any applicable sales charge, and it redeems shares at NAV from sellers, less any redemption fee.

Net asset value (NAV)

The price or value of one unit of a fund. It is calculated by summing the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding. Most open-ended funds companies compute NAVs once a day based on closing market prices.

Net assets

The total value of a fund's cash and securities less its liabilities or obligations.

No-load fund

A fund with no front-end or back-end load.

Nominal return

The stated, contractual rate of interest on a fixed-income security. The total return on an investment ignoring inflation.

Payable date

The date when unitholders will receive dividends assuming they have elected not to reinvest those payments in additional units. The payable date follows the ‘record date’ by anywhere from a few days to several weeks.

Portfolio

A group of securities in a common account. The term is used as a synonym for fund.

Portfolio rebalancing

The process of periodically revising a portfolio to restore the asset-class weights for stocks, bonds, and cash to their long-run target values. You do this by selling shares in appreciated asset classes and buying shares in under-represented categories.

Portfolio turnover

A measure of the amount of buying and selling activity in a fund. Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.

Premium

Refers to a closed-end fund trading at a price above NAV. Refers to a bond priced above its par (or face) value.

Prospectus/Letter of offer

A type of owner's manual for unitholders. The prospectus provides essential information about a fund's investment policies, objectives, risks and services, and information on management fees and important financial data including past performance.

Put option

A contract granting the buyer the right to sell a specific asset, such as a stock, at a fixed price during a limited time.

Real return

The amount by which a security's nominal return exceeds inflation. If inflation turns out to be much higher than investors had predicted, the real return can be negative. Obviously, the higher your real return, the better.

Record date

The date on which a fund determines its ‘unitholders of record’ who are entitled to an impending dividend or bonus units. The record date is normally the business day prior to the ex-dividend or ex-bonus date.

Redemption price

The price you receive when you sell fund units. It equals NAV less any back-end load (contingent deferred sales charge or redemption fee).

Reinvestment date

The date on which a dividend or bonus units will be reinvested in additional full and fractional fund shares. This is normally on the business day following the record date.

Sector fund

Any of various funds that invest exclusively in a specific industry or stock group.

Sector risk

The danger that a particular industry such as software/biotechnology will plunge.

Specialty fund

Funds that pursue a narrow and sometimes unusual investment orientation. Examples include funds that avoid certain objectionable types of companies or industries such as tobacco and environment-unfriendly companies. Specialty funds are not common in India.

Stock

A security that represents an equity or ownership interest in a corporation. Changes in a firm's earnings and financial condition have a major effect on its stock price. A portion of the firm's profits may be paid as dividends to shareholders.

Style

An investment philosophy or approach pursued by a fund manager as seen by the types of stocks held, such as large-cap value or small-cap growth companies.

Systematic Investment Plan (SIP)/Periodic Investment Plan (PIP)

A service enabling you to have a designated sum of money transferred regularly from your bank account or pay-check to the fund account. SIP enables an investor to benefit from compounding. (See Compounding)

Total return

The most complete measure of investment performance. Total return considers the price increase or decrease of an asset, along with its income or yield.

Transfer agent

The organization, usually a bank or trust company, that handles sales and redemptions , of fund shares, maintains shareholder records, computes the fund's NAV each day, and pays dividend and capital-gains distributions.Some fund families perform the transfer agent functions for themselves.

Treasury securities

Debt obligations of the union government. The government issues Treasury bills and other paper with maturities ranging from 1 year to 10 years. These securities are considered to be free of default risk but may carry interest-rate risk.

Value investing

A popular investment style that focuses on identifying under-priced securities. In contrast to growth investors, value investors try to buy stocks selling for low multiples of earnings, book value, or any other yardstick.

Withdrawal plan

A service offered by many mutual funds that allows you to receive cheques from the fund account on a regular basis.

Yield

The income (dividend/interest) received from an investment, generally over the past 12 months, expressed as a percentage of its current price.

Yield Curve

The relationship at a given point in time between yields on fixed-income securities with varying maturities-commonly, Treasury bills, notes and bonds. The curve typically slopes upward because longer maturities normally have higher yields, although it can be flat or even "inverted" or downward sloping.

Yield to maturity

The compounded annual total return expected on a bond investment if it is held to maturity and the issuer makes all promised payments on time and in full. To realize this return, you must be able to reinvest each interest payment at a rate equal to the yield to maturity.

Zero-coupon bond

A bond that makes no periodic interest payments. The final maturity payment includes accrued interest as well as principal. Zero-coupon bonds are sold at a discount to their maturity values.