Account statement

A document similar to a bank account statement that indicates the mutual fund units owned. A statement is issued each time the investor carries out a transaction.

Annual report

A write-up given to shareholders containing the yearly record of a mutual fund’s performance. The report also informs the investor about the fund’s earnings and operations. Reports are sent out yearly.

Asset

Any holding with monetary value such as stocks, bonds, real estate and cash.

Asset allocation

Investment strategy that diversifies assets among stocks, bonds and money market instruments to help reduce investment risk. It describes the composition of a fund’s or an individual’s portfolio. For equity funds, this would include a geographic and industry breakdown. For bond funds, it would show net currency exposure of the fund and the split between government, corporate and other fixed-income securities.

Asset class

Different types of investments such as stocks, bonds, real estate and cash.

Asset Management Company (AMC)

A firm that invests the pooled funds of investors in securities, in line with the stated investment objectives. For a fee, the investment company provides diversification, liquidity, and professional management service.

Balanced fund

A mutual fund scheme with an investment objective of both long-term growth and income, through investment in stocks and bonds. Generally 60% is invested in stocks and 40% in bonds , in order to provide access to relative safety of fixed income securities and the growth potential of equities.

Bear market

A period of time during which securities prices are falling in the stock market.

Benchmark

A standard used for comparison. Usually to provide a point of reference for evaluating a fund’s performance. The common benchmarks for diversified equity funds are the BSE Sensex, S&P CNX 500 or Nifty.

Beta

A measure of a fund’s volatility in relation to the stock market, as measured by a stated index. By definition, the beta of the stated index is 1; a fund with a higher beta has been more volatile than index, and a fund with a lower beta has been less volatile. Based on past historical records, a beta higher than 1.0 indicates that when the index rises, the stock will rise to a greater extent than the index; likewise, when the index falls, the stock will fall to a greater extent. A beta lower than 1.0, indicates that the stock will usually change to a lesser extent than the index. The higher the beta, the greater the investment risk.

Blue chip

Stock of a nationally known company that has a long record of profit, growth, and dividend payment, and a reputation for quality management, products, and services.

Bond

A debt security or IOU issued by a government entity or corporation, which generally pays a stated rate of interest, and plans to return the principal amount of the loan on the maturity date. Unlike stockholders, bondholders do not have corporate ownership privileges.

Broker

A broker is a licensed person authorised to receive commissions. Brokers are always affiliated with a brokerage company or broker-dealer network. A broker is basically a salesman who sells stocks, bonds, or mutual funds.

Bull market

A distinctive time period, during which the prices of securities are rising, usually characterised by high trading volumes.

Business Day

A Business Day is any day other than a Saturday, a Sunday or a day on which banks are not required or obligated by law or executive order to remain closed including the occasions when the functioning of the Banks/ RBI is affected due to a strike call made by a Recognised Union/ Management in any part of the country or those days on which normal business can not be conducted due to natural calamities or any other events.

Call money

Money that is loaned in the call market, which can be demanded for repayment on call. The term call money is also known as money at short notice as it is repayable in 24 hours. It is also traded in the money market.

Capital (or principal)

Initial amount of money invested, excluding any subsequent earnings.

Capital appreciation

Increase in the value of an asset such as a stock, bond, commodity or real estate.

Capital gains/ losses

Net profit or losses from the sale of securities in the fund’s portfolio. Short-term gains or losses are generated on securities held one year or less; long-term gains or losses pertain to securities held for more than one year.

Capital growth

A rise in the market value of a mutual fund’s securities shown by it’s net asset value per unit. This is a long-term objective of many mutual funds.

Certificate of Deposit (CD)

Short-term debt instrument issued by scheduled commercial banks excluding regional rural banks. They are unsecured instruments that mature between three months to one year.

Closed-end fund

A type of fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis. Price is determined by supply and demand.

Closing price

The price of a security after the final trade at the end of the day.

Commercial paper

Short-term unsecured instruments issued by a company that needs to raise money; and is willing to pay an interest rate. These are included in portfolios of some mutual funds. Such instruments have maturities ranging from 3 months to 1 year.

Commission

A fee charged by a broker or distributor for his or her service in the buying or selling of securities.

Commodity

A commodity is a product that trades on a commodity exchange. Examples of these are food, metal or another physical substance that investors buy and sell, including foreign currencies, financial instruments and indices.

Compounding

Interest earned not only on the initially invested principal but also on accumulated interest during the period.

Consumer Price Index

The index compiled by a governmental agency which tracks the cost of living by following the change in prices of basic goods and services over time. This index measures inflation.

Contingent Deferred Sales Charge (CDSC)

A type of exit sales load which is charged when units are redeemed within a specific time period following their purchase. These charges decline as the holding period increases.

Contrarian

Someone who goes counter to the herd. A contrarian seeks out-of-favour sectors and may sell when others buy.

Convertible security

Corporate security (usually preferred stock or bond) that is exchangeable for another form of security (usually common stock) at a predetermined price.

Convexity

Convexity is a measure of the way duration and price change when interest rates change. A bond is said to have positive convexity if the instrument’s value increases at least as much as duration predicts when rates drop and decreases less than duration predicts when rates rise.

Coupon

The interest rate on a bond or other debt security that the issuer is obliged to pay the holder until it matures. It is usually given as a percentage of the face value of the security.

Credit analysis

The process of analysing information on companies and bonds in order to estimate whether the issuer will meet with its future obligations to pay out.

Credit rating

A measure indicating the bond issuer’s credit worthiness, or his/ her ability to repay the loan. The bonds are rated by an independent rating agency such as CRISIL, ICRA, and CARE..etc

Credit risk

The potential for an issuer to default on its obligation to pay interest or principal on its debt security. Most government securities are considered to have little, if any credit risk.

Cumulative total return

Usually calculated in the same manner as standardised average annual total return, except that these figures represent the total change in value of an investment over the stated periods and do not reflect any sales charges.

Current assets

Assets that can be converted to cash within a year.

Current liabilities

Liabilities that must be paid within a year.

Cyclical stocks

Stocks which rise and fall in price with the state of the economy, in such industries as construction, automobile, engineering or those affected by the international economy such as shipping, aviation, and tourism. Cyclical stocks are also stocks which are affected by the natural environment such as fertilisers and tea. Examples of non-cyclical stocks would be drugs, insurance, basic foodstuffs and many other consumer products.

Debentures

Instruments of debt, usually unsecured. They are also usually credit rated.

Debt funds/ securities

A general term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, T-notes, T-bills and money market instruments are debt securities, but they vary in maturities.

Default

A term that denotes the failure to pay the principal or interest on a financial obligation (such as a bond).

Derivative

A derivative is an instrument whose value is derived from the value of one or more underlying security, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps.

Discount

Refers to the selling price of a bond when it’s price is below its maturity value.

Distribution

A payment to shareholders resulting from a mutual fund’s realised capital gains, interest, or dividend income. A mutual fund dividend, or distribution, may be physically paid to the investor, or it may be reinvested in the fund, giving the investor more shares.

Diversification

The investment strategy which spreads investments among securities in different industries, with different risk levels, and in different companies, potentially lowering risk by reducing the impact of any one security. Mutual funds provide diversification because their portfolios consist of a variety of securities, unless otherwise noted. Mutual funds are a diversified investment by nature

Dividend

An income distribution to shareholders that generally comes from the net profit or earnings of a corporation (or net income from a mutual fund). A change in the dividend rate, or amount, does not affect the fund’s share price.

Duration

Duration is a measure of a bonds’ price risk. It is weighted average of all the cash flows associated with a bond in terms of their present value.

Dow Jones Industrial Average

The oldest and most quoted measure of stock market price movements, an indicator showing how the market is going. It is a price-weighted average of 30 actively traded blue chip stocks.

Earnings (per share)

The net income for a company during a specific period. It is calculated by subtracting the cost of sales, operating expenses and taxes from revenues, for a specific time period. It is the reason corporations exist and often the single most important determinant of a stock’s price.

Entry load

The sales charge on mutual fund purchases.

Equity

A type of security representing part ownership in a company or corporation. Common stocks, preferred stock, and convertible stock are types of equity securities

Exit Load

A fee charged by some funds when units are sold. The amount sometimes depends on how long the investment was held, so the longer the time period, the smaller the charge.

Face value

The value printed on the face of a stock, bond or other financial instrument or document.

FCNR

A Fully Convertible Non-Rupee account that can be opened for funds coming in from abroad or from local funds. The funds in the account are held in a foreign currency.

Fixed assets

A long-term asset that will not be converted to cash within a year such as a house or a plot of land.

Fixed income securities

A security that pays a certain rate of return but does not offer an investor much potential for growth. This usually refers to government, corporate or municipal bonds, which pay a fixed rate of interest until the bonds mature, or preferred stock, which pays a fixed dividend. A mutual fund investing in these types of securities may also be referred to as a fixed-income investment or security.

Fixed rate

A loan in which the interest rates do not change during the entire term of the loan.

Floating rate

An interest rate which is periodically adjusted, usually based on a standard market rate outside the control of the institution. These rates often have a specified floor and ceiling, which limit the floating rate. The opposite of having a floating rate is having a fixed rate.

Floor

A lower limit for a price, interest rate, or other numerical factor. The price at which a stop order is activated (an order to buy or sell at the market when a definite price is reached either above (for a buy) or below (for a sell) the price that prevailed when the order was given). Also the area of a stock exchange where active trading occurs.

Front-end load

A one- time charge that investors pay at the time they buy fund units.

Fund manager

The person responsible for deciding which securities are to be part of the mutual fund’s portfolio.

Fund of Funds (FOF)

A fund that invests in other mutual funds, unlike a normal fund which invests in equity and fixed income securities.

Gilts

A type of government security.

Government securities

Securities that are sold to the public by the government, for example, bonds.

Growth funds

Mutual funds with a primary investment objective of long-term growth of capital. Unlike income, which is somewhat regular and consistent in most cases, growth is much less certain. Growth investments, however, usually outpace the returns on income investments over the long-term (five to ten years, or longer). A growth fund invests mainly in common stocks with significant growth potential.

Growth investing

A style of investing that invests in fundamentally sound businesses with the belief that the stock will go up in price. The stocks in this portfolio are well researched, liquid and of high quality and will usually give you a high P/E ratio and lower dividend yields in comparison to the market.

Holdings

The possessions or securities in an investor’s portfolio

Inception date

The first date from which a fund’s returns are calculated.

Income funds

A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Index

Statistical composite that measures changes in the economy or in financial markets. Usually, equity funds use BSE 30 or BSE 200 as the benchmark. For fixed-income funds it is a bond index. The benchmark index must consist of securities similar to which the scheme invests in.

Indexing

An investment strategy that consists of the construction of a portfolio (generally stocks) based on an Index. Funds that follow this approach are designed to track the total return of an index.

Inflation risk

The possibility that the value of assets or income will be eroded by inflation affecting the purchasing power of a currency. Often mentioned in relation to fixed income funds as they may minimise the possibility of losing principal.

Initial Public Offer (IPO)

A fixed time period during which units of a new fund are made available for sale to the public for the first time.

Interest rate risk

The risk that a security’s value will change due to an increase or decrease in interest rates. A bond’s price will always drop as interest rates rise and when interest rates fall, a bond’s price will rise.

Issue

A security made available to the public. Mutual funds issue shares to investors in return for cash.

Liabilities

The claims of investors who have loaned to a company. The debts of a company.

Liquidity

The ease with which an asset can be converted to cash. Mutual fund units are generally considered highly liquid investments as they can be sold on any business day at their current net asset value

Load fund

A mutual fundthat charges a sales fee. There are 2 types of loads: front-end, charged at the time of purchase and back-end, charged at the time of redemption.

Lock-in period

A period of time during which the investor is restricted from selling a particular investment.

Market risk

The potential loss that is possible as a result of short-term volatility of the stock market. Owning mutual funds may shield an investor from some market risk that a stockholder may be vulnerable to if their portfolio is not well diversified.

Maturity date

Date on which the principal amount of a debt instrument or bond becomes due and payable in full.

Maturity value

The amount the issuer agrees to pay out when the bond reaches its maturity date.

Modified Duration

Modified duration indicates the percentage change in the price of a bond for a given change in yield. The percentage change applies to the price of the bond including accrued interest..

Money market fund

A mutual fund that invests in short-term government securities, certificates of deposit and other highly liquid securities such as T-bills and short-term commercial paper. Such funds generally pay money market rates of interest. An investment in a money market fund is not insured or guaranteed by the government nor by any other entity or institution, so there is no assurance that the share price will be maintained.

Municipal bond fund

A mutual fund consisting of bonds issued by a state, city, or local government entity. The interest these securities pay is generally passed through to shareholders free of tax.

Mutual fund

A mutual fund is an investment that pools shareholders’ money and invests it toward a specified goal. Each fund’s investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those. Mutual funds offer investors the advantages of diversification, professional management,affordability, liquidity and convenience.

Net Asset Value

The NAV is the market value of mutual fund shares. It is calculated each business day based on the value of the assets of the fund minus its liabilities, divided by the number of shares outstanding.

Net profit margin

A measure of a company’s profitability and efficiency calculated by dividing a measure of net profits (operating profit minus depreciation and income taxes) by sales.

Net worth

The value found by subtracting total liabilities from total assets.

No-load fund

 A general term applied to mutual funds that sell shares at net asset value, either directly to the public or through an affiliated distributor, without the addition of a sales charge.

NRE

A Non-Resident External Rupee account that NRIs can open with any Indian bank. They can use this account for making investments in India on a repatriable. basis.

NRI

A Non-Resident Indian who is an Indian citizen or a person of Indian origin but who resides abroad. NRIs have to follow specific rules when investing in India.

NRO

An Ordinary Non-Resident Rupee account which can be opened for funds coming in from abroad or from local funds. The amount in the account is, however, non-repatriable.

Offer document

The offer document or prospectus is a legal document that contains important information about a fund’s investment goals, sales charges, expenses and risks. Its purpose is to provide investors with the information they need to make an informed decision about investing in the fund. An abridged offer document accompanies the application form of every fund.

Offering price

The price at which mutual fund shares are offered for sale to the public, also known as the public offering price. The public offering price represents the net asset value plus any applicable initial sales charges.

Open-end fund

 A mutual fund that does not have a fixed number of shares (as does a closed-end fund.) The mutual fund will offer as many shares as investors are willing to buy. Most mutual funds are open-ended unless otherwise noted.

Operating expenses

 The day-to-day costs and expenses necessary to run a company, such as the maintenance of office equipment.

Performance

How a fund has done in the past and how well it is doing at present. Past performance is often used to get an idea of future performance, however, past performance does not guarantee future performance.

Portfolio

A pool of individual investments owned by an investor or mutual fund. Portfolios may include a combination of stocks, bonds, and money market instruments. A list of the fund’s current portfolio will usually be contained in a mutual fund’s annual report.

Preferred stock

A type of stock whose holders are paid dividends at a specified rate. It has preference over common stock in the payment of dividends and the liquidation of assets, but does not ordinarily carry voting rights. The benefits of owning preferred stock are realised if the company ever goes bankrupt. If this occurs, preferred stock shareholders receive their money first

Price-earnings ratio (P/E)

One of the quantitative measures used by portfolio managers to help them value companies. It is calculated by dividing a company’s share price by its earning per share.

Principal (or Capital)

Initial amount of money invested, excluding any subsequent earnings.

Promissory note

A document signed by the borrower in which he promises to repay a loan under agreed-upon terms.

Prospectus (or Offer Document)

The prospectus is a legal document that contains important information about a fund’s investment goals, sales charges, expenses and risks. Its purpose is to provide investors with the information they need to make an informed decision about investing in the fund. An abridged offer document accompanies the application

Public Offering Price (POP)

The price at which mutual fund shares are offered for sale to the public. Also known as offering price. The public offering price represents the net asset value plus any applicable initial sales charges.The price at which mutual fund shares are offered for sale to the public. Also known as offering price. The public offering price represents the net asset value plus any applicable initial sales charges.

Rate of return

Rate of return is calculated by subtracting the purchase value by the present value and then dividing it by the purchase value. For equities, we often include dividends with the present value.

Real return

The rate of return earned on an investment after adjusting for the rate of inflation during the time the investment was held.

Redeem

Cashing in units by selling them back to the mutual fund.

Redemption load

A fee charged by some funds for redeeming or buying back fund shares. These charges often decline or are eliminated after a certain number of years

Redemption price

The price at which a mutual fund’s units are redeemed or bought back by a fund. The redemption price is usually equal to the current net asset value per unit and less the exit load if any.

Repatriable

The return from abroad of the financial assets of an organisation or individual, and the conversion of foreign currency to Rupees.

Repo

Repo or Repurchase Agreements or Ready Forward transactions are short-term money market instruments. Repo is nothing but collateralized borrowing and lending. In a repo, securities (like Government securities and treasury bills) are sold in a temporary sale with an agreement to buy back the securities at a future date at specified price.

Reporate

Repo rate is nothing but the annualised interest rate for the funds transferred by the lender to the borrower in a repo transaction.

RBI

Reserve Bank of India, established under the Reserve Bank of India Act, 1934.

Return

The sum of the income of a fund plus its capital gains.

Risk

In general, risk is the possibility of suffering loss. There are many types of risk, such as credit risk, principal risk, inflation risk, interest rate risk, and investment risk. If you are prepared to accept greater risk, you have the chance of earning higher returns or profits on your money. Low-risk investments, while generally safer, often don’t keep investors ahead of inflation.

Risk/ reward trade-off

The compromise made between high- and low-risk investments. High-risk investments generally have greater potential for high returns than low-risk investments.

Risk tolerance

The willingness of an investor to tolerate the risk of losing money for the potential to make money.

R-squared

Statistical measure of how closely the portfolio’s performance correlates with the performance of a benchmark index. R-squared is a proportion that ranges between 0.00 and 1.00. For example, an R-squared of 1.00 indicates perfect correlation to the benchmark index, while an R-squared of 0.00 indicates no correlation. Therefore, a lower R-squared indicates that fund performance is significantly affected by factors other than the market.

Rupee Cost Averaging

An investment strategy based on investing equal amounts in a fund at regular intervals. Because more shares are bought when prices are low and fewer shares when prices are high, the average cost of your shares may be lower than the average price over the period you bought them. Rupee- cost averaging cannot guarantee a profit or protect against loss in declining markets.

Sales charge

 A charge added on to the price of a mutual fund when you buy it.

SEBI

Securities and Exchange Board of India established under Securities and Exchange Board of India Act, 1992.

Sector funds

Funds that concentrate on one industry or sector of the economy such as information technology , pharmaceuticals, FMCG..etc. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries, but may offer greater potential returns. Avoid these types of funds unless you have a fair amount of investment expertise and a higher risk appetite.

Securities

The holdings of a mutual fund, such as stocks or bonds. Stocks are securities representing ownership shares. Bonds are securities representing a contractual debt obligation of the issuer to repay the holder, with interest.

Shareholder

The owner of shares of stock or shares of a mutual fund.

Shares

Units of ownership in a corporation or mutual fund. In a mutual fund, the value of each unit is calculated by dividing net assets by the number of shares.

Sharpe Ratio

Statistical measure of a portfolio’s historic “risk-adjusted” performance. Calculated by dividing a fund’s excess return by the standard deviation of those returns. As a measure of reward per unit of total risk, the higher the ratio, the better.

S & P 500 stocks (Standard & Poor’s Composite Index of 500 stocks)

Market value-weighted index that measures stock market price movements, based on the aggregate performance of 500 widely held common stocks.

Standard Deviation

Statistical measure of the historic volatility of a portfolio. It measures the dispersion of a fund’s periodic returns (often based on 36 months of monthly returns). The wider the dispersions, the larger the standard deviation and the higher the risk.

Stocks

A share of stock represents ownership, or equity, in a corporation. When a company needs money to grow and expand, it may sell part of its ownership to the public in the form of shares of stock. In exchange for the money received from the sale, the company gives shareholders a portion of its future profits, as well as a measure of its decision-making power. These securities generally have the most potential for capital appreciation, but their rights are subordinated in the event of a company liquidation or bankruptcy.

Switching

Transferring your investment from one scheme to another.

Systematic Investment Plan (SIP)

 A Systematic Investment Plan allows an investor to automatically buy shares or units according to a schedule the investor creates. It allows the investor to use the rupee cost averaging investment strategy.

Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan permits the investor to receive regular payments of a fixed amount from his investment in a mutual fund scheme on a periodic basis. Retirees in need of a regular income often opt for this.

Tax Deducted at Source (TDS)

No tax is withheld or deducted at source, where any income is credited or paid by a mutual fund, as per the provisions of Section 194K and 196A of the Act.

Top-down investing

The top-down style of investment management places primary importance on country or regional allocation. Top-down managers generally focus on global economic and political trends in selecting the countries or regions where they expect to find investment opportunities. Only then do they employ a more fundamental analysis of individual stocks in order to make their final selections.

Total return

Return on an investment over a specified period of time, which includes share-price appreciation, reinvested dividends or interest, and any capital gains.

Transaction costs

The costs incurred by the buying and selling of securities including broker commissions and the difference between dealer buying and selling price.

Treasury bills (T-bills)

A short-term debt instrument issued by the government with a maturity of one year or less.

Unit holder

The owner of units or shares of a mutual fund.

Value investing

The investment approach which favours buying under-priced stocks that are inexpensive relative to their intrinsic value and that may have the potential to perform well and increase in price in the future. It first seeks individual companies with attractive investment potential, then considers the economic and industry trends affecting those companies. Value managers usually begin their search with fundamental analysis, in order to find companies whose current prices may fail to reflect their potential longer-term value.

Volatility

The tendency of an investment or market to rise or fall sharply in price within a short-term period. Volatility is measured by various measures such as beta, Standard Deviation,R-squared,Sharpe Ratio.

Yield Curve

The relationship between time and yield on securities is called the Yield Curve. The relationship represents the time value of money – showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future.

Year to Date (YTD)

A time period in a calendar year starting from the first of January and ending on the first of January.

Yield to Maturity (YTM)

The yield earned by a bond if it is held until its maturity date.

Zero coupon bond

A bond that is sold at a fraction of its face value. It does not, however, provide periodic interest payments but pays principal upon maturity.

Compiled by:  Kwame Adjinu