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A vehicle for investing in stocks and bonds

A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the funds gains, losses, income and expenses.

Each mutual fund has a specific stated objective


The funds objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.

Some popular objectives of a mutual fund are Fund Objective


Equity (Growth) Debt (Income) Money Market (including Gilt) Balanced

What the fund will invest in


Only in stocks Only in fixed-income securities In short-term money market instruments (including government securities) Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk

Managed by an Asset Management Company (AMC)


The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.

The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.

All AMCs Regulated by SEBI, Funds governed by Board of Directors


The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the funds objectives are clearly spelt out in the prospectus.

In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMCs.

Net Asset Value or NAV


NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.

How is NAV calculated?


The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the funds NAV.

Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.

A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.

Load
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.

Open- and Close-Ended Funds 1) Open-Ended Funds


At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.

2) Close-Ended Funds
Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).

Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly).

Professional Money Management


Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.

Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.

Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).

Affordability
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).

Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.

Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section.

Flexibility and variety

You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the same fund.

Tax benefits on Investment in Mutual Funds


1) 100% Income Tax exemption on all Mutual Fund dividends

2) Equity Funds - Short term capital gains is taxed at 15%. Long term capital gains is not applicable. Debt Funds - Short term capital gains is taxed as per the slab rates applicable to you. Long term capital gains tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.

3) Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are exempt from the payment of dividend tax for a period of 3 years from 1999-2000.

Note: Equity Funds are those where the investible funds are invested in equity shares in domestic companies to the extent of more than 65% of the total proceeds of such funds.

Mutual funds are investment vehicles, and you can use them to invest in asset classes such as equities or fixed income. moneycontrolrecommends that you use the mutual fund investment route rather than invest yourself, unless you have the required temperament, aptitude and technical knowledge.

In this article we discuss why and how you should choose mutual funds. If you would like to familiarise yourself with the basic concepts and workings of a mutual fund, Understanding Mutual Funds would be a good place to start.

We are not all investment professionals


We go to a doctor when we need medical advice or a lawyer for legal guidance. Similarly, mutual funds are investment vehicles managed by professional fund managers. And unless you have a high Investment IQ, we recommend you use this option for investing. Mutual funds are like professional money managers, however a key factor in their favour is that they are more regulated and hence offer investors the ability to analyse and evaluate their track record.

Investing is becoming more complex


There was a time when things were quite simple - the market went up with the arrival of the first monsoon showers and every year around Diwali. Since India started integrating with the world (with the start of the liberalisation process), complex factors such as an increase in short-term US interest rates, the collapse of the Brazilian currency or default on its debt by the Russian government, have started having an impact on the Indian stock market.

Although it is possible for an individual investor to understand Indian companies (and investing) in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose asset management company invests in research) provide an option of investing without getting lost in the complexities.

Mutual funds provide risk diversification


Diversification of a portfolio is amongst the primary tenets of portfolio structuring (see The Need to Diversify). And a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.

What's strategy got to do with selecting a mutual fund? Shouldn't you just go and invest in the best performing fund? The answer is no. Mutual fund investing requires as much strategic input as any other investment option. But the advantage is that the strategy here is a natural extension of your asset allocation plan (use our Asset Allocator to understand what your optimum asset allocation plan should be, based on your personal risk profile). moneycontrol recommends the following process:

Identify funds whose investment objectives match your asset allocation needs
Just as you would buy a computer that fits your needs and budget, you should choose a mutual fund that meets your risk tolerance (need) and your risk capacity (budget) levels (i.e. has similar investment objectives as your own). Typical investment objectives of mutual funds include fixed income or equity, general equity or sector-focused, high risk or low risk, blue-chips or turnarounds, long-term or short-term liquidity focus. You can use moneycontrols Find-AFund query module to find funds whose investment objectives match yours.

Evaluate past performance, look for consistency


Although past performance is no guarantee for the future, it is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would

have thus demonstrated their ability to be not only good but also, consistent performers. You can engage in such research through moneycontrol's Find-A-Fund query module.

Diversify
Don't just zero in on one mutual fund (to avoid the risk of being overly dependent on any one fund). Pick two, preferably three mutual funds that would match your investment objective in each asset allocation category and spread your investment. We recommend a 60:40 split if you have shortlisted 2 funds and a 50:30:20 split if you have shortlisted 3 funds for investment.

Consider Fund Costs


The cost of investing through a mutual fund is not insignificant and deserves due consideration, especially when it comes to fixed income funds. Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards other annual expenses should be acceptable. Carefully examine load the fee a fund charges for getting in and out of the fund.

Having made an investment in a mutual fund, you should monitor it to see whether its management and performance is in line with stated objectives and also whether its performance exceeds or lags your expectations. Unlike individual stocks and bonds, mutual fund reviews are required less frequently, once in a quarter should be sufficient.

A review of the funds performance should be carried out with the objective of holding or selling your investment in the mutual fund. You might need to sell your investment in a mutual fund if any of the events below apply

You change your investment plan.


For example, as you grow older you might adopt a more conservative investment approach, pruning some of your riskier (equity-oriented) funds.

A fund changes its strategy.


A fund that alters its investment objective or approach might no longer fit your strategy.

The fund's poor results persist.


If a fund regularly trails other funds that invest in similar securities, consider replacing it. The poor performance is more often than not a reflection on the relative expertise of the asset management company.

By now you would have realized that investing in mutual funds is not just a decision but is more a process. moneycontrol's Mutual Fund Investing Checklist can help make this process easier and more efficient.

Mutual Fund Investing Checklist


Using the checklist below should help you to extract the most from your mutual fund investment process. We assume that you will be investing largely through mutual funds to meet your targeted asset allocation plan.

1. Draw up your asset allocation You can use moneycontrols Asset Allocator for this. Take a printout of your suggested asset allocation plan so that you can use that to plan your investments across mutual funds.

2. Identify funds that fall into your Buy List How do you do this? Simple. Just go to Find-A-Fund and run a query specifying the parameters you are seeking.

3. Obtain and read the offer documents You could do this by either asking your broker or the asset management companies. You might also find some of these documents if you go to our Request-A-Form service.

4. Match your objectives Read through the offer documents and check to see whether the mutual funds identified meet your investment needs in terms of equity share and bond weightings, downside risk protection, tax benefits offered, dividend payout policy, sector focus and other parameters of relevance to you. For ease in short listing, you can use our Find-A-Fund query module.

5. Check out past performance Make sure you do this. There is no other indicator that you can use as effectively to select funds for investment. Yet again (we wont tire of saying this), for ease you can use our Find-A-Fund query module to find out your selected funds performance over various time periods.

6. Don't forget the index funds Index funds offer you probably the ideal hedge against varying performance across sectors and across fund managers over longer-periods of time. moneycontrol recommends that you have atleast some part of your assets in index mutual funds (you would have seen this in your recommended asset allocation plan also if you have used moneycontrols Asset Allocator).

7. Think hard about investing in sector funds Investing in specific sector funds is recommended for aggressive investors. However, if you are not in close touch with the developments in the sector or do not review your portfolio regularly, we would not recommend investing in sector funds.

8. Look for `load' costs Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards annual expenses should be acceptable. Try and avoid funds that have a sales load, unless of course they have a consistent track record of being a top-performer.

9. Does the fund change fund managers often? Since you will be giving past track record a consideration, you are inadvertently relying on the continuity of the fund manager. Stay away from mutual funds whose fund managers change often.

10. Look for size and credentials As far as possible avoid investing in funds with an asset base of less than Rs25 crores. Which means that we are recommending you invest in funds only after they have established a track record. And unless it is a really exciting new (theme) fund that fits into your asset allocation plan, try and avoid new funds.

11. Customer Service Check out the customer service delivery mechanism of the mutual fund you choose. Can you get in touch with them easily? How long do they take to disburse payments? How often do they send you portfolio updates? And investor newsletters? These questions are important to address because shortcomings on any of these factors could affect your overall returns.

12. Diversify, but not too much Do not hold just one fund in each asset category. Its good to diversify your risk between different funds, but do not overdo it. moneycontrolrecommends two, or maybe three funds in each asset category.

13. Style, not returns matter first in the long-term Don't let a top performing fund veer you away from a disciplined approach. Stick to your chosen asset allocation plan.

14. Monitor regularly and review Try to review your mutual fund holdings atleast once a quarter. If you follow the same principles to review as you did to identify the mutual funds you invested in, you will be able to take `sell decisions' very easily. You can read more about this approach by clicking Step 3: Invest Monitor and Review.

15. Invest regularly, choose the MIP Try to make mutual fund investing an integral part of your savings and wealth-building plan. The monthly investment plan option offered by some mutual funds is a strongly recommended approach for you to execute this process . However, dont let the availability of this option override your fund selection criteria.

By now you would have identified your list of mutual funds that you want to invest in. List them down with reasons for your intended purchase. Next, you can fill in the application forms for these funds. You can easily obtain application forms for most of the mutual funds frommoneycontrols Request-A-Form service.

Acid Test Ratio: It is the ratio indicated by dividing a company's current assets by current liabilities. It reflects the financial strength of a company and hence called Acid test ratio. American Depositary Receipt (ADR): Shares of non-US companies traded in American stock exchanges in US dollars. ADRs work like any other share that we know of. They are negotiable receipts held in a US bank representing a specific number of actual shares (called ADS). For the American public ADRs simplify investing. So when Americans purchased Infosys stocks listed on Nasdaq, they could do so directly in dollars, without converting them from rupees. Such companies are required to produce financial results according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company. Arbitrage: Attempting to profit by exploiting price differences of identical or similar financial instruments on different markets or in different forms. Asset Allocation Fund: A fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, gold bullion and real estate stocks. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change. Alpha: Alpha measures the difference between a fund's actual returns and its expected performance, given its level of risk (as measured by beta). A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager. There are limitations to alpha's ability to accurately depict a manager's added or subtracted value. In some cases, a negative alpha can result from the expenses that are present in the fund figures but are not present in the figures of the comparison index. Alpha is dependent on the accuracy of beta: If the investor accepts beta as a conclusive definition of risk, a positive alpha would be a conclusive indicator of good fund performance. Of course, the value of beta is dependent on another statistic, known as R-squared. Annual Fund Operating Expenses: The expenses incurred, during a particular year, by Asset Management Company for managing the funds. Asset Allocation: The process of diversifying the investments in different kinds of assets such as stocks, bonds, real estate, cash in order to optimize risk. 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. Automatic Investment Plan: A plan offered by most mutual funds where a small fixed amount is automatically deducted monthly from an investor's bank account and invested in the mutual fund of their choice. Automatic Reinvestment: An investment option for mutual fund unit holders in which the proceeds from either the fund's dividends or capital gains, or both, are automatically used to buy more units of the funds Automatic Reinvestment: An investment option for mutual fund unit holders in which the proceeds from either the fund's dividends or capital gains, or both, are automatically used to buy more units of the funds Balanced Fund: Balanced fund include both equity and debt schemes, with 50-75 per cent in equity and the rest in debt.

Benchmark: An unmanaged group of securities whose performance is used as a standard to measure investment performance. Commonly known as a market index. Some well-known benchmarks are the BSE Sensex and NSE Nifty. Bid Or Sell Price: The price at which a mutual fund's shares are redeemed (bought back) by the fund. The bid or redemption price is the current net asset value per share, less any redemption fee or back-end load. Bluechip Fund: Mutual fund that invests in blue chip stocks. Typically a growth fund. Bond: A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate. Bond Fund: A mutual fund whose portfolio consists primarily of corporate, municipal or government bonds. These funds generally emphasize income rather than growth. Bond Rating: A system of evaluating the probability of whether a bond issuer will default. Standard and Poor's Corp. and Moody's Investors Services, among other firms, analyze the financial stability of both corporate and government bond issuers. Ratings range from AAA or Aaa (extremely unlikely to default) to D (currently in default). Bonds rated BBB or below by S&P or Baa or below by Moody's are not considered to be of investment grade. Mutual funds generally restrict their bond purchases to issues of certain quality ratings, which are specified in their prospectuses. Call Option: The right to buy a fixed number of shares/bonds at a particular price in a specified period. Capital Gain: Profit that results when the price of a secuirty held by a mutual fund rises above its purchase price. If the security is sold, then the capital gain is realized; if the security is still being held, the gain is unrealized. If the security has been held for more than a year, the gain is long-term; otherwise it is shorter-term. A capital loss occurs when the price of a security falls below its purchase price. Capital Gains Distributions: Payments made usually at the end of the year to mutual fund shareholders of gains realized on the sale of securities in the mutual fund portfolio. Capital Growth: A rise in market value of a mutual fund's securities, reflected in its net asset value per share. This is a specific long-term objective of many mutual funds. Certificate Of Deposit: An interest-bearing, short-term debt instrument issued by banks and thrifts. Closed-End Schemes: A mutual fund scheme in which the investors commit their money for a particular period. Contingent Deferred Sales Charge (CDSC): A fee (or back-end load) imposed by certain funds on shares redeemed within a specific period following their purchase. These charges are usually assessed on a sliding scale, such as four percent to one percent of the amounts redeemed, with the fee reduced each year the units are held. Conversion Privilege: Same as Exchange Privilege. Corpus: Total amount of money invested by all investors in a scheme. Coupon: The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually.

Credit Quality: Average credit quality gives a snapshot of the portfolio's overall credit quality. It is an average of each bond's credit rating, weighted by the relative size in the portfolio. Custodian: The bank or trust company that maintains a mutual fund's assets, including its portfolio of securities or some record of them. The custodian provides safekeeping of securities but has no role in portfolio management. Debt Fund: This fund invests in fixed income instruments such as debentures (bonds), Treasury Bills etc. Preferred by investors who want steady income and not willing to take much of risk. Deferred Sales Charge Schedule of Decline:The actual percent charged, or amount you will pay during the corresponding time periods. This amount or percentage that your pay goes down as time goes on. (the longer you hold the fund the lower the sales charge). Distributor: An individual or a corporation serving as principal underwriter of a mutual fund's shares, buying shares directly from the fund, and reselling them to other investors. Diversification: A basic risk management tool in which an investor maintains a mix of common stocks, bonds money markets and other investments to reduce potential risk. Dividend Plan: In a dividend plan the fund pays dividend from time to time as and when the dividend is declared. Dividend Stripping: When an investor invests with the idea of exiting from the fund immediately after the dividend is paid. Duration: Average duration provides a measure of a fund's interest-rate sensitivity the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Duration also gives an indication of how a fund's NAV will change as interest rates change. A fund with a five-year duration would be expected to lose 5% from its NAV if interest rates rose by one percentage point or gain 5% if interest rates fell by one percentage point. Entry Load: Mutual Funds charge investors an entry load of upto 2.25% to compensate for distribution costs. It is charged at the time an investor purchases the units of a scheme Equity Fund: This is a scheme that invests only in equity. Equity-Linked Savings Schemes (ELSS): The major portion of investment in ELSS is in equity. The dividends in this scheme are tax-free. Ex-Dividend Date: The date on which a fund's Net Asset Value (NAV) will fall by an amount equal to the dividend and/or capital gains distribution (although market movements may alter the fund's closing NAV somewhat). Exchange Privilege: A feature offered by some mutual fund in which an investor is able to switch from one scheme to another within the fund family without having to pay any charges. Same as Switching. Exit Load: The commission or charge paid when an investor exits from a mutual fund. They are basically imposed to discourage withdrawals.

Expense Ratio: A mutual fund's operating expenses, expressed as a percentage of its average net assets. Mutual funds with lower expense ratios are able to distribute a higher percentage of their total returns to their shareholders. Fiscal Year: An accounting period consisting of 12 consecutive months Floating Rate Debt: A bond or other type of debt whose coupon rate changes with market conditions (short-term interest rates). Fund Family: A mutual fund company offering many funds for various objectives. Fund Manager: The individual responsible for making portfolio decision for a mutual fund. Gilt Fund: Gilts are securities issued by the central government and are said to carry sovereign or minimal risk. Global Fund: A mutual fund investing in stocks or bonds through out the world. Growth Plan: A mutual fund whose primary investment objective is long-term growth of capital. Hedge Fund: A fund that may employ a variety of techniques to enhance returns. Hedging: A strategy designed to reduce investment risk. Hedging techniques uses call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss. Holding Period: Length of time that an individual holds a security Holdings: This is a fund's most recently reported top securities (excluding cash and cash equivalents for all but short-term bond funds). The securities are ranked by the percentage of the portfolio's net assets they occupy. With this information, investors can more clearly identify what drives the fund's performance. Inception Date: The fund inception date gives the date on which the fund commenced operations Income Fund: 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 Fund: A fund that specializes in the purchase of securities that match or represent a specific index. For example, BSE 30 index is a fund that seeks to mimic the returns represented by the BSE Sensex.

Initial Purchase: The smallest investment amount accepted for establishing a new account. The minimum initial purchase notifies the investor of monetary restrictions for becoming a shareholder. Generally speaking, institutional funds have the highest minimum initial purchase amounts. For those investors with only a small amount to invest, checking the fund's minimum initial purchase should be one of the first criteria you use when selecting an appropriate mutual fund. Interest Rate: The monthly effective rate paid (or received if you are a creditor) on borrowed money. Expressed as a percentage of the sum borrowed. Interest Rate Sensitivity: Interest-rate sensitivity, measured by the average effective duration the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Duration also gives an indication of how a fund's NAV will change as

interest rates change. A fund with a five-year duration would be expected to lose 5% from its NAV if interest rates rose by one percentage point or gain 5% if interest rates fell by one percentage point Intermediate Bond Fund: A mutual fund that invests in bonds with maturities within the 5 to 10-year range. Investment Objective: The financial goal (long-term growth, current income, etc.) that an investor or a mutual fund pursues. Investment yield: The annual percentage return which is considered to be for a specific valuation in an investment being expressed as the ratio of annual net income (actual or estimated) to the capital value. It is therefore a measure of an investor's opinion about the prospects and risks attached to that investment. The better the prospects and lower the risks, the lower the expected yield and thus the greater the capital value. Jobbers: Members of a stock exchange who stand ready to buy and sell shares in which they specialize are called jobbers Junk Bond: A speculative bond rated BB or below by Standard & Poor's Corp. and Ba or below by Moody's Investor Service. See Bond Rating. "Junk bonds" are generally issued by corporations of questionable financial strength or without proven track records. They tend to be more volatile and higher yielding than bonds with superior quality ratings. "Junk bond funds" emphasize diversified investments in these low-rated, high-yielding debt issues. Level Load: Commission (load) that does not vary depending on how long the investor held the investment. Liquid Fund: A liquid fund is the same as a money market fund, but avoids a lock-in period. Load: Commissions an investor pays to a mutual fund on entry (buying units) and exit (selling the units) Long-Term Capital Gain: A profit on the sale of a mutual fund share that has been held for more than one year. Management Fee: The amount a mutual fund pays to its investment advisor for services rendered, including management of the fund's portfolio. In general, this fee ranges from .5% to 1% of the fund's asset value. Money Market Fund: A mutual fund that invests only in money markets such as commercial papers, commercial bills, and treasury bills certificate of deposit and other instruments specified by RBI. These funds have a minimum lock-in period of 15 days. Till recently, the RBI regulated money market funds but they now come under SEBI. Mutual Fund: A Mutual Fund (MF) is a form of trust that pools the funds of a whole lot of investors to make more money by investing in an array of financial instruments. Net Asset Value (NAV): NAV represents the value of a unit in the scheme and is the main performance indicator for a mutual fund. Net Asset Value Per Unit: The current market worth of a mutual fund share. 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: This figure represents the fund's total asset base, net of fees and expenses. No Load Fund: Mutual fund that does not impose any sales charge or commission for buying and selling the units. Offer Document: Letter sent by a company making a takeover bid to the members of target company offering to buy their shares at a certain price. Open-Ended Schemes: Mutual fund schemes that continuously offer new units to the public are called open-ended schemes. They offer units for sale without specifying any duration for redemption. Operating Expense: Are the expenses that a company incurs for normal cause of business. Includes cost of raw material, wages, etc. Option: The right to buy or sell a security after a particular period and at a particular price and quantity. There are generally two kind of options, call option and a put option. A call option gives the right to the buyer of the option to force the writer of the option to sell a particular stock at a prefixed price within a particular period. A put option gives the buyer a right to force the writer to buy a particular stock at a prefixed price. Payable Date: The date on which distributions are paid to shareholders who do not want to reinvest them. This date can be anywhere from one week to one month after the record date. Portfolio Manager: A professional hired by the mutual fund advisor to make investment decisions concerning the purchase and sale of securities for the mutual fund portfolio in accordance with the fund's objectives. Portfolio Turnover Rate: The rate at which the fund's portfolio securities are changed each year. If a fund's assets total 100 crore and the fund bought and sold 100 crore worth of securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative funds which invest for the long term. High portfolio turnover rates generally add to the expenses of a fund. Premium: The amount by which a bond or stock sells above its par value. Price/Book Ratio: The price/book (P/B) ratio of a fund is the weighted average of the price/book ratios of all the stocks in a fund's portfolio. Book value is the total assets of a company, less total liabilities (sometimes referred to as carrying value). A company's book value is calculated by dividing the market price of its outstanding stock by the company's book value, and then adjusting for the number of shares outstanding. (Stocks with negative book values are excluded from this calculation.) Prime Rate: Interest rate that commercial banks charge their credit worthy borrowers such as large corporations. Prime Rate Fund: Mutual fund that attempts to match the return of the prime rate, by investing in high quality corporate debt. Prospectus: An official document that each investment company must publish, describing the mutual fund and offering its shares for sale. It contains information required by the Securities and Exchange Board of India including fees and expenses of the fund, past performance and how to buy and redeem shares. R&T Agents: Registrars and transfer agents (R&T agents) handle all paperwork involving investor servicing.

R-Squared: R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance. Record Date: The date the fund determines who its shareholders are; "shareholders of record" who will receive the fund's income dividend and/or net capital gains distribution. Frequently the business day immediately prior to the Ex-Dividend Date. Redemption Fee: Same as Back End Load. Redemption Price: The price at which a mutual fund's shares are redeemed (bought back) by the fund. The redemption price is usually equal to the current net asset value per share. Also called the bid, call or sell price. Reinvestment Date (Payable Date): The date on which a share's dividend and/or capital gains will be reinvested (if requested) in additional fund shares Reinvestment Privilege: The privilege some mutual funds give to their shareholders to use income or the capital gains to purchase additional shares of their fund without any sales charge.

Risk: The measure of an investor's ability to withstand volatility in the markets. Investors with a near-term focus are likely to be more conservative than those with a long-term viewpoint who can benefit from the market's fluctuations by taking advantage of compounding and historical growth of the markets. Rollover Option: At redemption, some funds offer investors the option of reinvesting the amount. An investor happy with the fund's performance may opt to continue. Rupee-Cost Averaging: A system of investing in which individual re-invests money into the same mutual fund on a regular basis, usually monthly

Sales Charge: Fees paid to a brokerage house by a buyer of shares in a load mutual fund.

Sector Fund: An equity scheme that invests in shares of companies operating in specific sector or industries is called a sector fund. For instance, a pharma fund would invest only in pharmaceutical companies. Series Fund: A mutual fund whose prospectus allows for more than one portfolio. Portfolios may be specialized (Sector Fund) or broad (growth stock, along with a money market portfolio). Management can create additional portfolios as it sees fit. Sharpe Ratio: The Sharpe ratio, provided by Lipper, is based on a risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated using standard deviation and excess return to determine reward per unit of risk. First, the average monthly return of the 90-day Treasury bill (over a 36-month

period) is subtracted from the fund's average monthly return. The difference in total return represents the fund's excess return beyond that of the 90-day Treasury bill, a risk-free investment. An arithmetic annualized excess return is then calculated by multiplying this monthly return by 12. To show a relationship between excess return and risk, this number is then divided by the standard deviation of the fund's annualized excess returns. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance. Specialty Fund: A mutual fund specializing in the securities of a particular industry or group of industries or special types of securities. Standard Deviation: Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time, the total returns of any given fund are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund's total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund's returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund's volatility. Stock Fund: A mutual fund that primarily invests in stocks. Subsequent Purchase: This indicates the smallest permissible additional purchase a fund will accept in an existing account. Switching: Moving money from one scheme to another with in the fund family. See Exchange privilege. Systematic Investment Plan (SIP): Systematic Investment Plan popularly known as SIP is a method of investing a fixed sum regularly in a mutual fund scheme. It is very similar to regular saving schemes like a recurring deposit. SIP allows one to buy units on a given date at regular interval, so that one can implement a saving plan for themselves. A SIP is generally preferred for an equity scheme and can be started with as small as Rs 500 per month. Systematic Withdrawal Plans: Many mutual funds offer withdrawal programs whereby shareholders receive payments from their investments. These payments are usually drawn from the fund's dividend income and capital gain distributions, if any, and from principal only when necessary. Transfer Agent: The organization, usually a bank, that mutual funds employ to prepare and maintain records relating to shareholder accounts. Some mutual fund groups operate in-house transfer agencies. Treasury Bills: A government security, sold through Reserve Bank of India for short-term loans, 91 days to 364 days. Treynor Ratio: A gauge of risk-adjusted performance calculated by dividing the excess return of a portfolio above the risk-free rate by its beta. Higher values are desirable and indicate greater return per unit of risk. Unit: Just as shares represent the extent of equity ownership in a company, units represent your extent of ownership in a mutual fund Unit Holder: An investor who invests money in mutual funds.

Unload: To sell the units of mutual fund. Venture Capital Fund: A limited company formed to provide venture or risk capital to new industries. Warrant: A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price. This "warrant'' is then traded as a security, the price of which reflects the value of the underlying stock. Warrants are issued by corporations and often used as a ``sweetener'' bundled with another class of security to enhance the marketability of the latter. Venture Capital Fund: A limited company formed to provide venture or risk capital to new industries. Warrant: A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price. This "warrant'' is then traded as a security, the price of which reflects the value of the underlying stock. Warrants are issued by corporations and often used as a ``sweetener'' bundled with another class of security to enhance the marketability of the latter. Withdrawal Plan: The facility to periodically redeem mutual fund and have proceeds mailed directly to the investor. Yield: Income or return received from an investment, usually expressed as a percentage of market price, over a designated period. For a mutual fund, yield is interest or dividend before any gain or loss in the price per share. Yield Curve: A graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the 2 or 5 year treasury with the 30 year. Zero Coupon Bond: Bond sold at a fraction of its face value. It appreciates gradually, but no periodic interest payments are made. Earnings accumulate until maturity, when the bond is redeemable at full face value. Nonetheless, interest is taxable as it accrues. As a result, zero coupon bonds are often used for IRAs, Keoghs and other tax-deferred retirement plans.