Mutual Fund Investments : Basics, Terms

Updated on: May 4th, 2023


13 min read

This article covers the frequently used terminologies that one may encounter while understanding or reading about Mutual Funds

1. Acid Test Ratio: It is the ratio obtained by dividing the current assets of a company by the current liabilities. It is an indication of the company’s financial strength

2. Annual Fund Operating Expenses:The expenses acquired by an asset management company for fund management during a particular year.

3. Asset Allocation: Diversification of investments into various kinds of assets for risk optimisation.

4. Asset Allocation Fund: This fund’s portfolio is comprised of various investments such as government securities, real estate stocks, gold bullion, domestic stocks, foreign stocks, and bonds. The proportion allocated to different sectors can remain constant or change as per market fluctuations.

5. Asset Management Company: A SEBI registered company that handles asset management and investment decisions for mutual funds.

6. Automatic Investment Plan:  An investment plan where a fixed amount is deducted every month from the investor’s bank account and invested in the chosen mutual fund.

7. Automatic Reinvestment: This option available for mutual fund unit holders involves diversion of earnings from fund dividends or capital gains to buy more fund units.

8. Back End Load: The charge levied on exiting a mutual fund to dissuade investors from withdrawal.

9. Balanced Fund:  A balanced fund comprises of both equity and debt funds with 50-75% allocated to equity and the rest to debt scheme.

10. Benchmark: Benchmark is an unmanaged group of securities whose performance is taken as a standard against the performance of other investments. BSE Sensex and NSE Nifty are a few benchmarks.

11. Bid or Sell Price: The price at which mutual fund shares are repurchased by the fund.

12. Blue Chip Fund: Mutual funds that invest in stocks of a well-established company. The stocks of such a company are called blue-chip stocks.

13. Bond: It is a debt investment where the investor lends the money to the company or the government for a particular period and interest rate.

14. Bond Fund: A mutual fund with a portfolio majorly comprising of corporate and government bonds. They are income-oriented rather than growth-oriented funds.

15. Bond Rating: It is a grade assigned to a bond indicating its credit quality. Bonds of blue-chip firms have a higher bond rating, which indicates the safety of the investment.

16. Capital Gains Distribution: This is the end of year amount paid to mutual fund shareholders which are obtained on selling securities in the mutual fund portfolio.

17. Capital Growth: The change in net asset value per share of a mutual fund’s securities due to an increase in its market value.

18. Certificate of Deposit:A short tenure debt instrument issued at a specified interest rate by banks.

19. Closed-End Schemes: A mutual fund scheme where the money is committed for a particular tenure by the investors.

20. Contingent Deferred Sales Charge (CDSC): It is a fee levied on the sale of a specific investment. It is a percentage of the invested amount, also known as an exit fee or redemption charge.

21. Conversion Privilege: The privilege shareholders gain through mutual funds to utilise the income obtained or capital gains for the purchase of additional shares without any sales charge.

22. Corpus: The net amount of money invested in a scheme collectively by all investors.

23. Coupon: The stated interest rate on a bond issuance. The coupon is semiannually paid.

24. Credit Quality: Average credit quality reflects the overall credit quality of the portfolio. Credit quality is given as an average credit rating of each bond, weighted by the relative size in the portfolio.

25. Custodian: Custodian is the trust company or bank that takes care of mutual fund’s assets and portfolio of securities or maintains a record of them. Custodian only serves the purpose of safekeeping and plays no role in portfolio management

26. Debt Fund: This fund invests in investment instruments like bonds, treasury bills etc. which are fixed income in nature. This is a preferred choice for investors who have a low-risk appetite.

27. Deferred Sales Charge Schedule of Decline:  The amount that needs to be paid for the corresponding time duration. The value of this amount goes down with time. Longer the fund is held, lower the sales charge.

28. Distributor: An individual or corporation involved in the direct buying of shares from the fund and reselling them to other investors.

29. Dividend Plan: In dividend plans, the investor receives timely dividends when they are declared.

30. Dividend Stripping:  The investor invests with the intention of exiting the fund as soon as the dividend is paid.

31. Duration: Its a measure of how sensitive a fund is to shift in interest rates. The longer a fund’s duration, the more vulnerable it is to interest rate fluctuations.

32. Entry Load: Entry fee levied at the time an investor buys units of a scheme.

33. Equity Fund: Mutual Fund scheme that invests only in equity.

34. Equity- Linked Savings Scheme: In this scheme, the majority of the invested in ELSS is in equity. The dividends earned in this scheme are tax exempt.

35. Ex-Dividend Date: The date on which the Net Asset Value (NAV) of a fund decreases by an amount equal to the dividend and /or distribution of capital gains.

36. Exchange Privilege: A facility offered by some mutual funds where the investor can make a midway switch from one scheme to another within the same fund type without incurring any charges.

37. Exit Load: The fee that an investor needs to pay upon exiting from a mutual fund. The charge is levied to dissuade investors from withdrawing.

38. Expense Ratio:  It tells how much amount needs to be paid to the fund for managing your money.

39. Floating Rate Debt: A bond whose stated interest rate changes as per market fluctuations.

40. Fund Family: A mutual fund company that offers various funds for different investment objectives.

41. Fund Manager: The person responsible for all decisions related to the mutual fund.

42. Gilt Fund: Gilts are securities that are issued by the government and carry minimal risk.

43. Global Fund:  A mutual fund investing in stocks or bonds all over the world.

44. Growth Plan: Mutual fund with long-term capital growth as the primary objective.

45. Hedge Fund: Hedge funds use a combination of different techniques to get higher returns.

46. Holding Period: The duration for which a security is held by an individual.

47. Holdings:A fund’s top performing securities.

48. Inception Date: The date on which the fund started operation.

49. Income Fund:The primary aim of this mutual fund is to enhance current income rather than long-term capital growth. This mutual fund invests in stocks and bonds which earn a higher return.

50. Index Fund: Funds that purchase securities that follow the pattern of returns represented by BSE sense.

51. Initial Purchase: The minimum amount required to open a new account. This amount notifies the investor of the monetary constraints he has as a shareholder. A fund’s initial purchase is an important criterion to check while selecting a suitable mutual fund.

52. Interest Rate: The monthly effective rate that is applicable to the amount borrowed. It is indicated as a percentage of the amount borrowed.

53. Interest Rate Sensitivity: Interest rate sensitivity is an indication of how sensitive a fund is to changes in interest rates. A fund with a longer tenure is more susceptible to interest rate changes and hence more volatile as a fund than a fund with a shorter tenure.

54. Intermediate Bond Fund: A mutual fund investing in bonds with a deposit period ranging from 5-10 years.

55. Investment Objective: The long term or short term financial goal that an investor or mutual fund strives for.

56. Investment Yield: The yield of an investment is related to the risks and prospects of the investment. If its a low-risk investment with better prospects than expected yield would be low, and the capital value would be higher.

57. Jobbers: Stock exchange brokers who are involved in buying and selling of shares they specialize in.

58. Level Load: Commission(load) that stays unchanged irrespective of the duration for which an investment was held by the investor.

59. Liquid Fund: Same as money market fund minus the lock-in period.

60. Load: The entry and exit fee that an investor pays on buying and selling units.

61. Lock-in- Period: The period for which a particular investment is restricted from being sold by the investor.

62. Long-Term Bond Fund: A mutual fund that invests in bonds with a maturity period of more than 10 years.

63. Long Term Capital Gain: The revenue generated by selling a mutual fund share that has been held for more than a year.

64. Management Fee: The fee paid by the mutual fund to the investment advisor for the portfolio management of the fund and other advisory services. The fee ranges from 0.5 to 0.1% of the asset value of the fund.

65. Money Market Fund: A mutual fund investing only in RBI specified investment instruments and money markets like commercial papers, treasury bills certificate, commercial bills etc. These funds come with a minimum lock-in period of 15 days and are regulated by SEBI.

66. Mutual Fund:  It is a kind of trust with pooled funds from a number of investors for the purpose of wealth creation by investing in various financial avenues.

67. Net Asset Value: NAV is the value of one unit in the mutual fund scheme and is a measure of the fund’s performance.

68. Net Asset Value Per Unit: The present market value of a mutual fund share. It is calculated daily by considering the total assets i.e. securities, accrued income, deducting the liabilities and then dividing the result by the number of outstanding units.

69. Net Assets: It is denoted as total assets minus the total liabilities.

70. No-load Fund: Mutual fund in which no charge is levied on the sale or purchase o units.

71. Open Ended Schemes: Mutual fund schemes that issue new units to the public on a regular basis are called open-ended schemes. The duration for redemption is not specific.

72. Operating Expense: The expenses acquired for operating a business. Includes raw material, maintenance charges cost etc.

73. Payable Date: The date on which dividends are paid to shareholders who do not plan on reinvesting them.

74. Portfolio Manager:  Portfolio manager is hired by the fund advisor to handle investment decisions regarding buying and selling of securities for the mutual funds according to the fund’s objective.

75. Price/Book Ratio: It is a metric to compare the market value of a stock to its book value. It is represented as Market Price per share divided by the book value per share.

76. Prime Rate Fund:  A mutual fund that purchases some percentage of corporate loans from banks and pays the interest to shareholders.

77. R& T agents: Registrars and transfer agents that are responsible for all paperwork involved in investor servicing.

78. Redemption Fee: The fee levied on an investor for exiting a mutual fund. This is imposed to dissuade investors from withdrawing.

79. Redemption Price: The price at which the fund repurchases a mutual fund’s shares. It is often equal to the present net asset value per share. The redemption price is also known as sell price, bid etc.

80. Reinvestment Privilege: Some mutual funds allow their shareholders to use the income from capital gains to buy additional shares without having to pay any sales charge. This is a reinvestment privilege.

81. Risk: Measure of the ability of an investor to withstand market fluctuations and volatility.

82. Roll Over Option: This is an option offered by some funds where after redemption investors can choose to reinvest the amount if the fund’s performance is good.

83. Rupee Cost Averaging: A system in which the investor re-invests money into the same mutual fund periodically.

84. Sales Charge: Fees remitted to a brokerage house by a purchaser of shares in a load mutual fund.

85. Sector Fund: An equity scheme that invests in shares of companies belonging to a particular sector. For example, an IT fund would invest only in IT companies.

86. Series Fund: A mutual fund whose prospectus allows for multiple portfolios. Portfolios can be specialized or broad.

87. SIP: SIP or Systematic investment plan works similar to a recurring deposit plan where the investor can make a monthly/quarterly fixed contribution. SIP is a good option for investors who don’t have a lump sum to invest.

88. Stock Fund: Mutual fund primarily investing in stocks.

89. Subsequent Purchase: The smallest additional purchase a fund allows an existing account.

90. Systematic Withdrawal Plans: This is a plan offered by many mutual funds where shareholders are given payments from their investments. Money for the payments is usually sourced from the fund’s dividend income and capital gain distributions.

91. Treasury Bills: A government security sold for a duration of 91-364 days. The security is sold by the Reserve Bank of India.

92. Unit: Represents the extent of ownership of an investor in a mutual fund.

93. Unit Holder: An investor who invests money in mutual funds.

94. Unload:  Selling units of mutual fund.

95. Venture Capital Fund:  A limited company that supports new industries by providing them risk capital.

96. Withdrawal Plan: It is a facility to redeem mutual funds periodically and have the proceeds sent directly to the investor.

97. Zero Coupon Bond: It is a bond that is sold at a fraction of its face value. There are no periodic interest payments made, but the bond value increases with time. The earnings from the bond accumulate until the maturity period, and then the bond is redeemable at full face value.

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Quick Summary

The article explains terminologies related to mutual funds like asset allocation, entry load, expense ratio, net asset value, etc. It provides definitions and explanations for terms commonly encountered in the mutual fund sector.

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