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MUTUAL FUND GLOSSARY Life Insurance General Insurance Loan Tax Planning
Being alert hoping stock
market are not sufficient, an approach /strategy which systematically
does investment with a definite goal.
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The return earned in annual
babsis which would have
generated over a year on a compounded basis. This method is the best indicator
to measure the performance of a fund.
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Asset Management Company (AMC)
A Company registered with
SEBI, which takes investment/ divestment decisions for the mutual fund, and
manages the assets of the mutual fund. e.g. for Sun F&C mutual fund , the AMC is
Sun F&C Asset Management (India) Pvt. Ltd.
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It is the process of
allocating the overall corpus to different assets like equities, bonds, real
estate, derivatives etc.
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A kind of redemption charge
that an investor has to pay for withdrawing his money from the mutual fund. It
is basically imposed to discourage investors from exiting the fund. It is also
popularly referred to as an Exit Load.
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A fund that invests
substantially both in debt and equity.
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It is a strategy of selecting
the company for investment first and then cross checking it by evaluating
factors pertaining to the industry and the economy. It is the opposite of the
top-down approach to investing.
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A fund where investors have
to commit their money for a particular period. In India these closed-ended funds
have to necessarily be listed on recognized stock exchanges which provides an
exit route.
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Contingent deferred sales charge (CDSC)
An exit charge permitted
under the regulations for a no-load scheme
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Is the date from which the
units are available for sale and repurchase at a price linked to NAV of the
scheme.
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The total investable funds
available with a mutual fund scheme at any point of time.
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It is the risk that the
issuer of a fixed income security may default on payment of interest and
repayment of principal. It is also referred to as default risk.
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A debt instrument that is
long term in nature and has a fixed date of redemption.
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A fund that invests in debt
securities like Government securities, Treasury Bills, corporate Bonds etc.
These funds are generally preferred by investors wanting steady income and not
willing to take higher risks.
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The process of converting the
physical /paper shares in Electronic form. SEBI had made it compulsory to get
the shares of some companies dematerialized. In this process the investor opens
an account with a Depository Participant (DP) and the number of shares the
investor holds is shown in this account.
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An authorized body who is
involved in dematerialization of shares and maintaining of the investors
accounts.
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Discount/Premium to (Net Asset Value) NAV
It is the difference between
the unit price and NAV. If the price is higher than the NAV, the units are
trading at premium: if the price is lower, the units are trading at a discount.
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It is the investment strategy
of not putting all one’s eggs in one basket. By diversifying a portfolio across
different industries, overall risk of the portfolio is reduced.
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The strategy of dividing the
investible amount into a number of equal parts and buying at regular intervals
to take advantage of lower prices. This strategy is more beneficial in a bear
phase.
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A portfolio which ensures
maximum return for a given level of risk or a minimum level of risk for an
expected return.
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It is a mutual fund that has
a core philosophy of investing in a particular factor or style in the market.
They are also referred to as Style Funds. Examples of factor funds are Mid-cap
funds, Low P/E funds, Growth funds etc.
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An investment plan in the
shape of a pyramid structure where the safest investments are at the base and
the riskiest investments at the peak.
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A type of security that pays
fixed interest at regular intervals. These comprise gilt-edged securities, bonds
(taxable and tax-free), preference shares and debentures. Less risky than equity
shares and have little scope for capital appreciation.
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An initial amount charged by
a fund for its administrative expenses or for paying commissions to brokers. If
the charge is made at the termination or redemption, it becomes a back-end load.
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Government securities and
bonds, usually with a low interest rate. Considered safest investments, as the
government security is free from default risk. Originally such certificates were
edged with gold and hence the name.
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Funds that invest
predominantly in government securities and treasury bills. It is good for
investors who desire safety of principal and adequate liquidity.
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A mutual fund which invests
in highly risky but potentially profitable investments. Such a fund usually has
a short life.
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A fund that invest primarily
in equities and has capital appreciation as its investment objective
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A professional manager
appointed by the Asset Management Company to invest money in accordance with the
objects of the scheme.
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A method of investment
analysis based on the fundamentals like turnover, net profit, growth, and vision
of a company. The boom or depression of the stock markets are not considered in
this analysis.
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A fund that usually invests
in debentures, bonds, and high dividend shares. Preferred by investors who wants
regular income. It pays dividends to the investors out of its earnings.
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A fund whose portfolio is
benchmarked against a popular index like the BSE Sensex or the BSE
Natex. Such an investment philosophy reflects the belief that the
market is efficient and trying to beat the market over the long term is futile
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The dates on which the
initial subscription to the units of the scheme can be made. It is similar to
the IPO of an equity issue. This initial offer period is followed by a
continuous offer period.
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The change in the price of a
debt security due to changes in the market interest rates is the interest rate
risk. For debt oriented mutual fund schemes, this interest rate risk affects the
NAV of the fund. A rise in the interest rates leads to a fall in the price of a
fixed income security.
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An advance installment of the
dividend finally declared. More often one, but sometimes two such payments are
made. The final dividend is often at least equal, and sometimes more. The
interim dividend is a fair indication of a company's profitability, during the
working year.
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A fund that invests its
corpus in short term instruments like call markets, treasury bills, Commercial
Paper (CP), Certificate of Deposit (CD).
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It is the risk in a fixed
income security as well as in equities that these securities may not be sold in
the market at close to their value. Liquidity risk is characteristic of narrow
markets like India.
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A charge by the fund when an
investor buys (entry load) or sells (exit load) units in the fund.
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Represents the market value
of the company. It is a product of the current market price and the number of
shares outstanding.
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A fully negotiable instrument
for short-term debt.
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A fixed minimum number of
shares, in which or in multiples of which, shares are bought and sold on the
stock exchange. The advent of dematerialization of shares will do away the
significance of market lot.
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This is calculated as total
assets minus all expenses and divided by the number of outstanding units. This
is the main performance indicator for a mutual fund, especially when viewed in
terms of appreciation over time.
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Shares of an open-ended fund,
which can be bought directly from the fund without any sales charge or
brokerage. US-64 is an example of a no-load fund.
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The price at which units can
be bought from a fund.
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A fund domiciled outside the
country where investments are made. It is often a tax haven, not subject to the
tax laws of the holder's country.
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Ranking equally. After
conversion of debentures into shares, the new shares created carry the same
rights as the existing shares of the company to receive dividends, rights and
bonus shares, and to participate in the company's profit and loss.
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Exactly the reverse of active
portfolio management. The portfolio manager assumes that markets are efficient
and all information is already analyzed and reflected in the prices of shares.
This strategy is based on the premise that it is impossible to consistently beat
the market.
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Evaluation of credit risk in
fixed income securities. This evaluation is specific to the security rated and
is done in India by Crisil, Icra, Care and Duff & Phelps.
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It is the date announced by
the company/mutual fund, which is a cut-off date for corporate benefits like
dividends, rights, bonus etc. Only investors whose names appear in the company’s
registers on that date are eligible for the said benefits.
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It is a plan where the
earnings of a mutual fund scheme are reinvested back in the fund.
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It is the risk that the
interest on fixed income instruments cannot be reinvested at the same rate. This
problem becomes pronounced in a falling interest rate scenario.
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Such funds invest only in
stocks belonging to a specific industry usually aimed at growth. For e.g.
Kothari Pioneer Infotech Fund. Sector funds are generally considered to be risky
in nature.
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Financial documents which
give the owner specific rights of ownership; these include: equity and
preference shares, debentures, treasury bills, government bonds, units of mutual
fund, and any other marketable documents.
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Money regularly set aside in
a separate fund and invested by a company for the repayment of debt instruments
(fixed deposits, debentures, other loans) or the redemption of preference
shares, or for replacement of assets.
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Sponsor is the parent
organization that contributes the initial capital of the asset management
company (AMC). e.g. Kotak Mahindra Finance is the sponsor for Kotak Mahindra
Mutual Fund.
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Transferring from one scheme
to another in a group of schemes operated by a Mutual Fund, where the rules so
permit. A switching fee may or may not be charged.
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A type of fundamental
analysis of the health of a company by examining its strengths(S), weakness (W),
business opportunity (O), and any threat (T) or dangers it might be exposed to.
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This is the market risk that
a security faces and is essentially non-diversifiable in nature. This risk is
caused by macro level factors like changes in inflation, interest rates, budget
announcements etc.
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Such funds allow the income
tax payees to claim a rebate under the Income Tax Act.
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A method of prediction of
share price movements based on a study of price graphs or charts on the
assumption that share price trends are repetitive. Since investor psychology
follows a certain pattern, what is seen to have happened before is likely to be
repeated. The technical analyst is not concerned with the fundamental strength
or weakness of a company or an industry; he only studies price and volume
behavior.
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An approach to stock
selection which evaluates the prospects of the economy first, then the prospects
of the industry and then finally the prospects of a particular company to take
an investment decision. It is the opposite of a bottom-up approach to investing.
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Professional firms, now
mostly computerized, which maintain the records of shareholders of their client
companies.
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These are bills of exchange,
i.e., IOUs, issued by the Reserve Bank of India for short-term loans, 91 days to
364 days.
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The trustee is the legal
owner of the mutual fund. The trustee takes into custody or under its control
all the capital and property of every scheme of the mutual fund and hold it in
trust for the unitholders of the scheme.
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This is the proportion of
risk that is specific to a particular company. This diversifiable risk could
arise due to company specific factors like operational factors, financial
factors, labor unrest etc.
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Investment in shares whose
intrinsic value is above their market price. Fundamental analysts often make
recommendations of value investment, as they can spot undervalued shares.
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It is a fund that takes over
the non-performing assets of bank or financial institution at a discount and
issues pass-through units to the investors.
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A limited company formed to
provide venture or risk capital to new industries.
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A coupon is an interest warrant attached to a debt instrument, and the coupon rate is the rate of interest. A zero-coupon bond carries no interest, but is sold at a discount to its face value, which is the maturity value. The difference between the discounted price and the maturity value represents the interest on the bond.