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Home >> Services >> Wealth Management >> Mutual Funds >> Glossary
Glossary

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Advisor

The organization employed by a mutual fund to give professional advice on the fund's investments and to supervise the management of its assets.

 Asked/Offering Price

It is the price at which the units of a mutual fund are offered for sale on the Stock Exchange. It means the current net asset value (NAV) per share plus entry load/sales charge, if any.

Asset Allocation

Some mutual funds spread the risk in their portfolio by diversifying their investment between a wide range of securities, thus giving a great advantage to the small investors, something which they can hardly afford to do. This could range from investments in Indian and international stocks, government and private bond, or even gold bullion. The choice of selecting how much to invest where is called Asset Allocation. Some funds keep the proportion of allocation between different investments constant while others vary it, depending on the market situation and their investment objectives.

 Asset Management Company (AMC)

An AMC is a corporate entity, which manages a Mutual Fund scheme and markets the scheme. It is separate from the trustees who own the scheme. In return for its services, it is paid a management fee out of the corpus of the mutual fund.

 Automatic Reinvestment

It is an arrangement made with the investor wherein the accrued interest or dividend on his investment is automatically added to his principal amount in order to earn more interest on it.

Back-end load/exit load

An investor selling his open-ended scheme units back to the Mutual Fund receives the NAV minus a small deduction, which is called the back-end or exit load. This is a charge levied on the investor especially for premature withdrawals. All Mutual Funds don't charge this load. As per the SEBI guidelines, a Mutual Fund is allowed to charge a maximum of 7% of the NAV as a load.

Banker to the Fund

These are the banks that offer their services to the mutual fund for their operations. This would entail collection of funds at its launch and subsequently as well as for its daily operations.

Bond Fund

These are mutual funds which invest only in debt instruments like bonds and debentures, keeping an eye on guaranteed and safe though slightly lower returns.

Balanced Fund

This is a Mutual Fund scheme investing about half its corpus in debt and the other half in equity. This helps balance the risk and return for the scheme.

 Capital Appreciation Plan

This is also referred to as the Growth scheme. Instead of distributing dividends declared by the Mutual Fund, it is reinvested in the scheme thus increasing the Net Asset Value (NAV).

Capital Growth

When the market value of the securities of a mutual fund increases, so does the Net Asset Value (NAV) of its units. This is called capital growth, which is the specific objective of most mutual funds.

Certificate of Deposit

It is a document from a bank which says that money is deposited with them at a certain guaranteed rate of interest for a certain period of time. Mutual funds use this kind of investment for their money market schemes because they have a very high liquidity.

 Commercial paper

When a company wants to borrow for a short-term from the market, it gives the lending party a unsecured promissory note, an IOU called the Commercial Paper (CP). Like other money market instruments, it is issued at a discount. This means that it receives a lesser amount than what is mentioned in the CP, the difference being the interest that it pays back on redemption. Since it is not attached to any security, the RBI has laid down certain conditions for the issue of CPs, wherein the issuing company has to have certain credit ratings, minimum tangible net worth, asset classifications etc, in order to avoid a situation of defaulted payments.

Confirm Date

The date the fund processes your transaction, when you purchase units.

Contingent Deferred Sales Charge

All that this high-sounding term means that it is basically an exit charge /back-end load imposed by certain funds which gets progressively reduced, the longer the subscriber stays in the fund.

Custodian

It is an independent party which keeps custody of the share certificates and securities bought by the mutual fund for its investors. It has no authority to sell or deal in them, but can only release or accept them as per the instructions of the Asset Management Company (AMC).

Daily Dividend Fund

This term applies to funds that declare their income dividends on a daily basis and reinvest or distribute monthly.

Diversification

It means placing money in a wide range of investments. It is this feature of a mutual fund that makes it so desirable for the small investor since it also minimizes his risk and guarantees safe returns.

Exchange Privilege / Switching Privilege

This is also known as the "lateral shift", a facility given by some mutual funds to its investors which enables them to switch their investments from one scheme to another. For example, if the stock market is on a high, they can switch over from a debt fund to an equity fund. If, on the other hand, they anticipate a fall, they can transfer their funds to a safer income fund.

 Ex-Dividend Date

Ex-dividend refers to the Net Asset Value (NAV) not including the right to receive the next dividend. As such, the ex-dividend date is the date on which the NAV reflects the dividend. If you buy a Mutual Fund unit on the ex-dividend date, you are not entitled to the dividend.

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. Since it is the small investors who have to ultimately bear the cost of running the mutual fund therefore at the outset, one has to see that the fund expenses are not too high, or if they are, they should be offset by a good performance.

 Fund Manager

They are highly skilled professionals who are appointed by the Asset Management Company (AMC) in order to effectively manage the investments of the mutual fund.

 Income / Dividend

It is a method of distributing income where dividend is paid to the investor at regular intervals, which may be monthly, quarterly, half yearly or yearly.

Investment Objective

This reflects how and where a Mutual Fund plans to invest its funds collected from the subscriber. This is announced at the time of its launch.

Initial Public Offering (IPO)

When a Mutual Fund is set up it launches its schemes by offering units to the public at the face value. This is the first time the Mutual Fund issues its units and is called the Initial Public Offering (IPO).

Listing

It means that the units of that fund can be bought or sold on the Stock Exchange. Listing of mutual funds provides liquidity - it gives the investor an exit option before maturity of the scheme. This provision is compulsory for close-ended schemes of Mutual Funds.

Load

It is a charge that the mutual fund levies on the investor at the time of entering the scheme or exiting from it.

Load Fund

Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. This is charged for the marketing cost, administration cost, etc. of the fund. Typically entry and exit loads range from 1% to 2%.

Lock-in period

This is a period during which units of a Mutual Fund scheme cannot be sold or transferred by the investor. This usually is the case in Tax-saving schemes, which have a three-year lock-in under section 88 of the Income tax Act. It also exists in a scheme, which allows exemption from payment of capital gains tax from sale of Mutual Funds units under section 54EC of the Income tax Act.

 Management Fee

The Asset Management Company (AMC) that manages and markets the Mutual Fund scheme charges a fee to the corpus of the scheme for its efforts. This fee can range between 1% and 1.25% of the scheme's corpus. This fee is payable irrespective of the performance of the scheme.

 Market Price

This is the price at which the units of the close-ended scheme are quoted on the stock exchange where the units are listed.

Mutual Fund

A Mutual Fund is a trust by entity set up under the Indian Trusts Act. This entity owns all the assets/securities on behalf of the investors and appoints an AMC to manage the scheme corpus.

 Net Asset Value (NAV)

This shows the actual market value of the units of a Mutual Fund scheme. It is calculated by dividing the total market value of all the investments of the scheme by the number of outstanding units of that scheme. This is used as a yardstick to calculate the performance of the scheme. Outstanding units are the total number of units issued by the fund to its investors.

Payable Date

The date on which distributions are paid to shareholders who do not want to reinvest them. This date can be anywhere from one week to one month after the Record Date.

Portfolio Turnover Rate

The rate at which the fund's portfolio securities are changed each year. If a fund's assets total Rs.10 crore and the fund bought and sold Rs.10 crore worth of securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative funds that invest for the long term. Note that a high portfolio turnover often adds up to the fund's expenses.

Prospectus

A prospectus is an information document published by the mutual fund, which states its investment objectives, details of its operation, information on its board and management and other useful facts.

Record Date

It is the date when a shareholder is registered in order to qualify for dividend. This becomes necessary because the units of the mutual funds are constantly changing hands. It becomes imperative to identify who is the right owner at the time of giving dividends and other benefits.

Redemption

It means repayment of a loan or debt. A close-ended scheme has a fixed tenure after which it returns the money and income it has earned to its investors. This is called redemption. In case of an open-ended scheme, an investor can apply for redemption anytime after the scheme re-opens for subscriptions after the Initial Public Offering (IPO).

Redemption Fee/Redemption charge

A fee charged by some funds for redeeming, or buying back units.

Redemption Price

It is a price at which a Mutual Fund scheme redeems its units to the investor on maturity (in case of a close-ended scheme) on application for redemption (in case of an open-ended scheme).

Reinvestment Date

The date on which a Mutual Fund scheme's dividend and/or capital gains will be reinvested (if requested) in additional units of the scheme.

Reinvestment Option

A service that most mutual funds offer whereby a unit holder's dividends and capital gains distributions are automatically reinvested in additional units.

Repurchase

In case of an open-ended scheme, repurchase is when an investor applies to the Fund for his money back and in the case of a close-ended scheme, it implies for a fund which provides for a facility to buy-back units before the end of the tenure of the scheme.

Re-sale

An open-ended scheme allows new investors to buy its units even after the Initial Public Offering (IPO) is over. However, the sale is made at NAV-based price and not at face value, as in the initial offering. This is termed as re-sale.

Rupee cost-averaging

It is a simple way of optimizing one's earnings by systematic investment, where you put a fixed amount every month or so to buy units regardless of what their Net Asset Value (NAV) is. This automatically ensures that you get more units when the price is down and less when they are up and saves you the trouble of tracking and timing your entry and exit into the market.

Sponsors

They are the people who establish the Mutual Fund Trust and its Asset Management Company (AMC). They are the shareholders of the AMC and earn dividends from the profits earned by them.

Systematic Withdrawal Plans

This is a facility allowed by most open-ended mutual funds whereby the investor puts in a lump sum as investment and then receives income from it in the form of automatic withdrawals.

 Trust

Literally it means management of money or property for someone. Here it means an organization that sets up a mutual fund - a pool of money, which it collects from the public, and invests it stocks and securities for them under a Trust Deed.

Units

Units are issued by a Mutual Fund scheme to investors indicating their investment in the Scheme. Units are like equity shares with a face value of Rs.10 each.

Yield

The return earned on an investment, usually expressed as a percentage. There are specific measures of yield to deal with different securities and situations.

 Zero Coupon Bond

This is a bond that does not pay you any interest on your investment. Instead, it mentions a certain amount, called the face value that is much higher than your investment, which you will receive at the time of its maturity.

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