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Mutual Fund jargon
- Asset Management Company (AMC)
AMC is a company or a fund house set up to manage its clients’ investment of mutual funds in accordance with their financial goals. AMC makes investment decisions on the behalf of clients after carefully crafting scheme objectives.
- Asset Allocation
Asset allocation is an investment strategy which aims to spread investor’s portfolio across several assets such as equities, bonds, gold and cash according to their age, goals, risk tolerance ability and investment horizon. Mutual fund schemes too follow this strategy, albeit as per their investment objective. For instance, a hybrid mutual fund scheme such as balanced funds typically has an allocation up to 65% in equity, and the remaining in debt and cash equivalents. Investors can, thus, look at the asset allocation of a mutual fund scheme and map it to their individual asset allocation.
AUM or assets under management refers to the recent / updated cumulative market value of investments managed by a mutual fund or any investment firm.
- Balanced Fund
This refers to a class of mutual fund, which invests in debt and equity instruments in different proportions such as 60:40, 50:50, 30:70 or any other ratio. The investors can avail twofold benefits: steady return from debt instruments and capital appreciation from equity instruments.
Benchmark is a standard with which the performance of a mutual fund scheme can be compared with. A group of securities, usually a market index, is used as a benchmark. Nifty, Sensex, BSE200 and BSE 500 are examples of such benchmarks.
- Capital Gain
The profit earned from sale of securities and other capital assets, including mutual fund units is known as a capital gain. For example, if an investor purchased one unit of mutual fund for Rs 100 and sold it later for Rs 110, then his capital gain is Rs 10. Capital gain can be short-term or long-term depending on the period of holding and the type of asset held.
- Consolidated Account Statement (CAS)
CAS refers to a single account statement which combines the transactions in all folios of an investor across all the mutual fund schemes/ fund houses. SEBI has mandated all asset management companies to ensure that a CAS will be issued every month to investors in whose folios transactions have taken place during the month. CAS is issued for those folios which have a) financial transactions in a month and, b) identical unit holders (identified by a valid PAN).
A bank deposit earns interest income. When this interest is re-invested, it earns more interest. This is due to the factor of compounding. The compounding factor applies to mutual funds as well. When you re-invest the dividends or income from mutual funds instead of withdrawing, the investment grows faster.
- Debt/Income Fund
This refers to a class of mutual fund which invests in debt instruments such as certificate of deposits, treasury bills, commercial papers, PSU bonds, corporate debentures and gilts. This is more for investors who don’t want to assume risk of investing in equity funds and are content with returns which just about beat inflation and FD returns.
When a part of the profits earned on a mutual fund scheme is transferred to shareholders, this profit is called dividend. The amount of the dividend depends on how well the scheme has performed and announced only if there are realized gains.
- Equity Fund
This refers to a class of mutual fund which invests more than 65% of the investment in equity or equity related securities. The returns tend to be higher in the long-term and are directly related to the stock market movement. These are meant for investors who are willing to assume risk for want of better returns and are comfortable with stock market related volatility.
- Equity Linked Savings Scheme
This refers to a special mutual fund product, by investing in which investors can avail tax benefits under section 80C of the Income Tax Act of India. These are equity schemes locked-in for a period of 3 years and there is no interim exit possible in such schemes.
- Growth Funds
Unit trusts or Mutual Funds which invest with the objective of achieving mostly capital growth rather than income. Growth funds are mostly more volatile than conservative income or money market funds because managers invest on shares or property that are subject to larger price movements.
- Index Fund
A mutual fund which invests in a portfolio of shares that matches identically the constituents of a well known stock market index. Hence changes in the value of the fund mirror changes in the index itself.
Load is a charge that mutual fund companies may levy at the time of entry into or exit from the scheme. Load is levied as a percentage of NAV.
- Net Asset Value (NAV)
NAV is the price of one unit of a mutual fund. It is calculated by deducting all current liabilities from the total asset or market value of the scheme’s portfolio, and then dividing that by the number of units outstanding. NAV fluctuates in accordance with the value of mutual fund’s holdings and is calculated at the end of the every business day. When you see that the NAV of a mutual fund is ₹500, it means that you will have to pay ₹500 for one unit of that mutual fund.
- Open-End Fund
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis.
- Price-To-Earnings Ratio (P/E)
The ratio of the market price of the share to earnings per share. This measure is used by investment experts to compare the relative merits of a number of securities.
- Rupee Cost Averaging
Rupee Cost Averaging means investing a fixed sum at regular intervals irrespective of the unit price of the mutual fund. By doing so, the average cost and investment risk of the mutual fund units goes down. An investor can purchase more shares when the price is low and fewer shares when the price is high.
- Systematic Investment Plan (SIP)
SIP is based on ‘Rupee Cost Averaging’ and ‘Compounding’ concepts. It allows you to invest a fixed amount periodically (monthly, quarterly, etc.) and continuously to purchase additional units of the mutual fund scheme at the ongoing NAV on the day of purchase. Since the money is auto-debited from the investor’s bank account, it inculcates a habit of compulsory savings and builds long-term wealth.
- Systematic withdrawal plan (SWP)
Systematic withdrawal plan helps investors to redeem a fixed amount of their investments from their mutual funds on a pre-determined frequency. The amount withdrawn can be used to meet planned and unplanned expenses as well as to re-invest according to an individual’s life stage / asset allocation plan. SWPs ensure one receives the amount in parts rather than the whole so that the spending is planned effectively and are also more tax efficient in case of withdrawals from debt oriented mutual funds in comparison to dividend options and bank FDs.
- Systematic transfer plan (STP)
Systematic transfer plan allows investors to transfer the pre-defined amount on a specified date from one particular scheme to another by giving one-time instruction to the fund house. STP is a useful tool to take a step-by-step exposure to equities or to reduce exposure over a period of time. Investors sometimes want to withdraw their money from the equity MF scheme and transfer it systematically to a debt scheme or a money market scheme of the fund house or vice versa.
Volatility equates to the variability of returns from an investment. It is an acceptable substitute for risk; the greater the volatility, the greater is the risk that an investment will not turn out as hoped because its market price happens to be on the downswing of a bounce at the time that it needs to be cashed in. The problem is that future volatility is hard to predict and measures of past volatility can, themselves, be variable, depending on how frequently returns are measured (weekly or monthly, for example) and for how long.
- Yield to Maturity
The Yield to Maturity or the YTM is the rate of return anticipated on a bond if held until maturity. YTM is expressed as an annual rate. The YTM factors in the bond’s current market price, par value, coupon interest rate and time to maturity.
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