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GLOSSARY ON MUTUAL FUNDS

Glossary on Mutual Funds: Account Statement A physical document, similar to a bank account statement, representing the mutual fund units owned. Issued to the unit holder every time he/she carries out a transaction. Annual Report Unabridged financial results that comprise historical per unit statistics and complete portfolio of schemes of a mutual fund for a certain period. It is sent to unit holders once in a year. Appreciation An increase in an investments value. Asset Allocation The process of diversifying investments among different types of assets like stocks, bonds and cash in order to optimize risk / return tradeoff based on a persons financial situation and goals. Asset Class Different types of investments such as stocks, bonds, real estate and cash. Asset Management Company A firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management service than is normally available to individual investors. Asset-Backed Security A debt instrument backed by loan paper or accounts receivable from banks, companies or other providers of credit. Assets An item of value owned by an individual or an organization. It could be stocks, cash, house or a car. Automatic Investment Plan Periodic investment of a fixed amount by a unitholder, either directly from his bank account or by issuing post-dated cheques, in his mutual fund account. It allows the investor to benefit from rupee cost averaging. Automatic Withdrawal Plan Allows an investor to receive periodic payments of fixed amount or units from his investment in a mutual fund scheme. Retirees who want a regular income supplement often choose this. Average Portfolio Maturity The average maturity of all the bonds in a bond funds portfolio.

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GLOSSARY ON MUTUAL FUNDS


Back-End/ Redemption Load One of two possible sales charge imposed by funds that charge fees. Redemption load is a charge an investor pays when units are redeemed or sold back to the fund. It sometimes depends on how long the investment is held -- generally the longer the time period, the smaller the charge. Balanced Scheme A mutual fund scheme with an investment objective of both long-term growth and Income, through investment in stocks and bonds. Typically, the stock-bond ratio ranges around 60%-40% in an effort to obtain the highest returns consistent with a low risk strategy. Basis Point (BP) The smallest measure used in quoting yields on fixed income securities. One basis point is one percent of one percent, or 0.01%. Bear Market A prolonged period of falling securities prices in a 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 equity-oriented funds is the BSE 200 index or the BSE Sensex. Beta A measure of a funds 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 the market, and a fund with a lower beta has been less volatile than the market. Based on past historical records, a beta higher than 1.0 indicates that when the market rises, the stock will rise to a greater extent than that of the market; likewise, when the market 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 that of the market. 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 an IOU, issued by a company or government agency. A bond investor lends money to the issuer and, in exchange, the issuer promises to repay the loan amount on a specified maturity date; the issuer usually pays the bondholder periodic interest payments over the period of the loan. Bond Scheme A scheme that invests primarily in bonds with the general emphasis on income over growth.

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GLOSSARY ON MUTUAL FUNDS


Bottom-Up An investment strategy that first seeks individual companies with attractive investment potential, then considers the economic and industry trends affecting those companies. Bull Market A prolonged rise in the price of stocks, bonds or commodities characterized 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 Recognized Union/ Management at any part of the country. Call money Money which is loaned in the call market, which can be demanded for repayment on call, which basically means immediately. 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. Call Risk The risk that bonds will be redeemed (or "called") before maturity. This possibility increases during periods of falling interest rates. Capital Appreciation An increase in the value of an investment, measured by the increase in a fund unit's value from the time of purchase to the time of redemption. Capital Gain The amount by which an investments selling price exceeds its purchase price. Capital Market A market where debt or equity securities are traded. 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. Compounded Annualized Growth Return (CAGR) When you deposit money in a bank it earns interest. When that interest also begins to earn interest the result is compound interest. Compounding occurs if bond income or dividends from stocks or mutual funds are reinvested. Because of compounding the money has potential to grow much faster.

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GLOSSARY ON MUTUAL FUNDS


Contingent Deferred Sales Charge (CDSC) A type of back-end sales load charged when shares are redeemed within a specific period following their purchase. Usually assessed on a sliding scale, these charges reduce, the longer the units are held. Closed-End Scheme A mutual fund scheme that offers a limited number of units which have a lock-in period, usually of three to five years. ELSS schemes are closed-ended schemes. The units of closed-end funds are often listed on one of the major stock exchanges and traded like securities at prices which may be higher or lower than its net asset value Commercial Paper Debt instruments issued by corporations to meet their short-term financing needs. Such instruments are unsecured and have maturities ranging from 15 to 365 days. Commission A fee charged by a broker or distributor for his/her service in facilitating a transaction. Compound Interest 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 follows the cost of living by following the changes in price of basic goods and services over time. This index measures inflation. Convertible security Corporate security (usually preferred stock or bond) that is exchangeable for another form of security (usually common stock) at a predetermined price. Coupon Interest rate on a debt security that the issuer promises to pay to the holder until maturity. Usually expressed as a percentage of the face value of the security. Credit Rating A measure of a bond issuer's creditworthiness or the ability to repay the loan as rated by an independent rating agency, such as CRISIL, ICRA and CARE.

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GLOSSARY ON MUTUAL FUNDS


Credit Risk The possibility that a bond issuer will default, and fail to repay principal or interest as promised. Also known as "default risk." Cumulative Quantitative Discount (CQD) Cumulative quantitative discount (CQD) is discount on sales load to investors on increasing purchase of units. 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. Currency Risk The possibility that fluctuating currency exchange rates will affect the rupee value of an investment. Custodian The organization (usually a bank) that keeps and safeguards the custody of securities and other assets of a fund. 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 fertilizers 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

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GLOSSARY ON MUTUAL FUNDS


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 Financial instrument whose value is based on the value of another underlying security. Depreciation A decline in an investment's value. Discount Refers to the selling price of a bond when its price is below its maturity value. Distribution The payment of dividends to unit holders by a mutual fund. Diversification The strategy of spreading investments among different securities to reduce risk. By nature, mutual funds are a diversified investment. Dividend When companies pay part of their profits to the shareholders those profits are called dividends. A mutual funds dividend is money paid to shareholders from investment income the fund has earned. The amount of each shares dividend depends on how well the company does. Dividend Reinvestment A unitholder service that allows dividend distributions to be reinvested automatically to purchase more fund units. 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)

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GLOSSARY ON MUTUAL FUNDS


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 stocks price. Equity Schemes A scheme that invests primarily in stocks while seeking to provide relatively high long-term growth of capital. Ex-Dividend Date The date following the record date for a scheme. When a fund's net asset value reduces by an amount equal to a dividend distribution. Expense Ratio A fund's operating expenses, expressed as a percentage of its average net assets. Face value The value printed on the face of a stock, bond or other financial instrument or document. Family Of Schemes A set of schemes with different investment objectives from a single asset management company usually allowing investors to switch their investments from one scheme to another at a no charge or a nominal charge. 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 deposit An investment instrument where you invest a fixed amount of money for a fixed period of time at a fixed rate of interest. Fixed Income Security A security that pays a fixed rate of interest such as a bond but do not offer an investor much potential for growth. Front-End Load A one-time charge that an investor pays at the time of buying units of a scheme.

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GLOSSARY ON MUTUAL FUNDS


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. Fully Invested The investment of nearly all available assets in securities as per the stated objective of the scheme and having no cash or cash equivalents in ones portfolio. Fund Manager The individual responsible for making portfolio decisions for a mutual fund. Government securities Securities that are sold to the public by the government, for example, bonds. Growth An investment objective of equity funds which seek to provide capital gains, rather than dividend income. 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 longterm (five to ten years, or longer). It invests mainly in common stocks with significant growth potential. Growth Investing An investment style that seeks stocks with the belief they will go up in price, regardless of the stock's current price relative to its underlying value. Often discussed in contrast to value investing Holdings

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GLOSSARY ON MUTUAL FUNDS


The possessions or securities in an investors portfolio. Historical Yield Yield provided by a scheme, typically a money market fund, over a specific time period. Inception Date The date when a schemes initial offering period ends and the schemes formation takes place. Income /Debt Scheme A scheme that invests primarily in fixed income securities. Typically, income schemes seek to provide current income rather than growth of capital. Index A benchmark against which the performance of a scheme is measured. 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. Index Fund A fund that tries to mirror the performance of an index by investing in securities making up that index. (note: it is not possible for investors to actually invest in the actual index, such as the BSE 30). 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 while they may minimize the possibility of losing principal, they expose an investor to inflation risk. Initial Public Offer (IPO) The first sale of units of a scheme by a mutual fund to the public. Usually, for a fixed time period. Interest rate risk The risk that a securitys value will change due to an increase or decrease in interest rates. A bonds price will always drop as interest rates rise and when interest rates fall, a bonds price will rise. Investment Grade High quality bonds that are rated AAA or higher by a rating agency. Investment grade bonds are considered safe. However, the higher the bond's rating, the lower the interest it offers. Investment Objective A schemes investment goal. Say, a growth scheme typically has an investment objective of providing long-term growth of capital.

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GLOSSARY ON MUTUAL FUNDS


Load A one-time sales charge paid by an investor while buying or selling units of a scheme. Typically, there are two types of loads front-end charged at the time of purchase and back-end charged at the time of redemption. Liabilities The claims of investors who have loaned to a company. The debts of a company. Liquidity The ease with which an investment can be converted into cash or cash equivalents. Mutual fund units are generally considered highly liquid investments as they can be sold on any business day at their current net asset value Listed Securities which are traded and listed in any of the approved Stock Exchanges of India will be treated as listed security. Lock-in period A period of time during which the investor is restricted from selling a particular investment. Management Fee The amount a scheme pays to its asset management company for its services. Typically, a certain percentage of assets under management. A fund's management fee is listed in its offer document. Market risk The potential loss that is possible as a result of short-term volatility of the stock market, indicated by beta. Owning mutual fund shields an investor to some market risk that a stockholder may be vulnerable to because of their diversification. Market Timing Attempting to time the purchase and sale of securities or mutual fund units to coincide with market conditions. Maturity Date The date on which the principal amount of a bond is to be paid in full. Maturity value The amount the issuer agrees to pay out when the bond reaches its maturity date. Minimum Purchase The smallest investment amount a scheme will accept to open a new unitholder account.

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GLOSSARY ON MUTUAL FUNDS


Money Market Fund A fund that invests in the short-term, high-grade securities sold in the money market including government securities, treasury bills, certificates of deposit, and commercial paper. Mutual Fund An investment company through which an investor can pool his money with other investors who have a similar objective. Professional investment managers, then invest the pool in securities which in their judgement will help investors achieve their objective. Mutual funds offer the benefits of portfolio diversification (which provides greater safety and reduced volatility), professional management, liquidity and convenience. Net Asset Value (NAV) The market value of a mutual fund unit. It is calculated daily by taking the funds total assets, securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of units outstanding. Net Assets The net worth of a fund. Net profit margin A measure of a companys 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 fund that sells its units to investors without a sales load/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.

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GLOSSARY ON MUTUAL FUNDS


Offer Document / Prospectus A legal document, that describes a mutual fund scheme. It contains information required by the Securities and Exchange Board of India explaining the offer, including the terms, issuer, objectives, historical financial statements, and other information that could help an individual decide whether the investment is appropriate for him. Offering price 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. Open-Ended Scheme A scheme where investors can buy and redeem their units on any business day. Its units are not listed on any stock exchange but are bought from and sold to the mutual fund. Operating Expenses The day-today costs a mutual fund incurs in conducting business, such as for maintaining offices, staff, and equipment. These expenses are paid from the fund's assets before any earnings are distributed. Performance A measure of how well a fund is doing. Typically, mutual fund performance measures are yield (for dividends) and total return (which measures dividends plus changes in net asset value). Increase in the Net Asset Value (NAV) Portfolio A collection of securities owned by a mutual fund. A fund's portfolio may include a combination of stocks, bonds, and money market securities. Portfolio Manager The individual responsible for managing a mutual fund's portfolio. Portfolio Turnover The rate of trading activity in a fund's portfolio of investments. In other words, how often securities are bought and sold. Preferred stock A type of capital 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. General (also known as common) stockholders may not receive any money, if none is remaining after paying preferred stock holders.

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GLOSSARY ON MUTUAL FUNDS


Price-earnings ratio (P/E) One of the benchmarks used by portfolio managers to help them value companies. It is calculated by dividing a companys share price by its earning per share. Principal The original amount initially invested, exclusive of earnings. Promissory note A document signed by the borrower in which he promises to repay a loan under agreed-upon terms. Public Offer Price The price at which an investor can buy units of a mutual fund scheme. It includes the current net asset value plus any sales load. 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 return earned on an investment after adjusting for the rate of inflation. Record Date The date on which a unitholder must officially own a scheme's units in order to receive declared dividend. Redeem To cash in units by selling them back to the mutual fund. Redemption Price The price at which a mutual funds units are redeemed, or bought back, by the fund. It is usually the current net asset value per unit less exit load if any. Reinstatement Privilege A facility which allows unit holders who have redeemed units, and then wish to reinvest, to reinvest without paying the sales load. There is generally a 30-day time limit for this service.

Repatriable

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GLOSSARY ON MUTUAL FUNDS


The return from abroad of the financial assets of an organization or individual, and the conversion of foreign currency to Rupees. 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, do not usually produce a high return, hence the loss of potential gain. Risk/ reward trade-off The compromise made between high- and low-risk investments. High-risk investments generally generate more earnings, while low-risk ones generate a lower rate of return. Risk tolerance The willingness of an investor to tolerate the risk of losing money for the potential to make money. Rollover A movement of funds from one investment to another, often similar, investment. Typically used when securities are maturing. Rupee Cost Averaging An investment strategy that involves investing a fixed amount in a scheme at regular intervals say, monthly or quarterly. As a result, more fund units are bought when prices are low than at high prices, usually bringing down an investor's average cost per share over time. Sales charge A charge added on to the price of a mutual fund when you buy it. Sector Fund A fund that invests primarily in securities of companies engaged in a specific industry. Sector funds entail more risk, but may offer greater potential returns than funds that diversify their portfolios. 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.

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GLOSSARY ON MUTUAL FUNDS


Settlement Date The date by which a transaction must be settled, that is, to make the payment of funds and the delivery of securities. Standard Deviation A measure of the degree to which a fund's return varies from the average of the schemes own return. Stock Fund A fund that invests primarily in stocks. Switching The movement of investment from one scheme to another usually within the family of schemes. An investor may switch schemes because of market conditions. Systematic Investment Plan (SIP) Allows an investor to periodically invest in units by issuing post-dated cheques. It allows the investor to benefit from rupee cost averaging. Systematic Withdrawal Plan (SWP) Permits the investor to receive regular payments of a fixed amount or capital appreciation from his investment in a mutual fund scheme on a periodic basis. Retirees in need of a regular income often opt for this. Top Down An investment method that first defines major economic and industry trends, and then identifies specific companies that are likely to benefit from those trends. Total Return A fund's performance that takes into account: income from dividends and unit price appreciation/depreciation over a time period. Treasury bills (T-bills) A short-term security with a maturity of one year or less. Treasury bonds (T-bonds) A long-term debt instruments with a maturity of 10 years or longer. Treasury notes (T-notes) A certificate representing an intermediate-term loan to the government with a maturity between two to ten years.

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GLOSSARY ON MUTUAL FUNDS


Transaction costs The costs incurred by the buying and selling of securities, including broker commissions and the difference between dealer buying and selling price. Transfer The process of changing ownership of a unitholder account within the same scheme. Transfer Agent A firm employed by a mutual fund to maintain unitholder records, including purchases, sales, and account balances. Treasury Bill (T-bill) A debt security issued by the Indian government, having a maturity of less than a year. Turnover Rate Based on the corpus, it is the number of times at which the fund buys and sells securities each year. Unitholder An investor, owning units of a mutual fund. Unlisted Securities which are not traded or listed in any of the approved Stock Exchanges of India will be treated as unlisted security. Unrealized Gain Or Loss Increase or decrease in the prices of securities held by the fund. Value Investing The investment approach which favours buying under priced stocks that have the potential to perform well and increase in price. Volatility The rate by which the price of a security fluctuates in changing market conditions. Year To Date (YTD) A period in a calendar year starting January 1 of that year and ending on that date. Yield The annual rate of return on an investment usually expressed as a percentage. Yield Curve A graph depicting yield vis-a-vis maturity. If short-term rates are lower than long-term rates, it is

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GLOSSARY ON MUTUAL FUNDS


a positive yield curve, if short-term rates are higher, it is a negative or inverted yield curve. If there is isnt much difference, it is a flat yield curve. Yield To Maturity (YTM) The yield earned by a bond if held to maturity Zero Coupon Bond A bond issued at a discount, which accrues interest that is paid in full at maturity. The maturity value an investor receives is equal to the principal invested plus interest earned compounded semi-annually at the original rate to maturity. Interest income from zero-coupon bonds is subject to taxes annually even though no payments will be made

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