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Mutual Fund terms explained

  • Marisha Bhatt
  • Jan 12 2022
  • 13 minutes
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We all have heard a lot about mutual funds over the years. They have also become a go to investment product and are part of almost all the portfolios of individual investors. Despite this, there are many investors that may not know the meaning or relevance of all the terms associated with a mutual fund.

Given below are a few terms that are associated with investing in mutual funds that can help in increasing investors’ awareness.

Mutual fund terms

Most of the terms mentioned below are often used in daily parlance. Given below is a simpler or better understanding of the same.

  • Asset Management Company (AMC)

Asset Management Company is the company or the firm that manages the fund. A single AMC can introduce many mutual fund schemes of different investment objectives. The AMC is responsible for all the aspects of the fund like investments, accounting, marketing, redemptions, etc. All AMCs have to be registered with SEBI. 

  • Assets under management (AUM)

Assets Under Management or AUM refers to the updated market value of all the assets that are managed by the fund.

  • Asset Allocation

Asset allocation is the diversification or classification of the assets into various categories based on risk optimization strategy. The corpus of the fund is distributed in various categories like equity, debt or other assets based on the investment goal and the risk factor. 

  • Annualized returns

It is a hugely popular tool to measure the overall performance of the fund. Annualized return is the measure of the returns that have been generated or can be generated by the fund over the period of a year.

  • Balanced funds

Balance funds or Hybrid funds are a combination of the equity funds and debt funds. A fund having more of an equity base is known as an equity oriented fund. Similarly, a fund having more of a debt base is known as a debt oriented fund. The taxation of these funds is based on the dominant asset of the fund.

  • Benchmark Index

Benchmark index is the standard against which the performance of the mutual fund is measured or compared. The objective of the mutual fund is to provide returns that are equal to higher than that of the benchmark index.

  • Bull market

Bull market refers to the market scenario where the market is on a high and the equity and equity related instruments (as well as other instruments like debt, money market, commodities etc.) see a huge increase in their prices and performance 

  • Bear Market

Bear market is the opposite of a bull market where the market experiences a period of prolonged decrease in prices of the equity and equity related instruments (as well as other instruments like debt, money market, commodities etc.). This market slump is when the prices fall by 20% or more based on market or investor sentiment and other external factors like policy change, global recession, disasters or even the more recent example like a pandemic. 

  • Bonds

Bonds are in the nature of debt instruments where the investor invests money with specific government schemes or corporates for a fixed period of time with the returns expectation in the form of interest over the tenure of the bond and a corpus fund at the maturity of the bond.

  • Blue Chip Stocks

Blue chip stocks are the stocks of the giants or the large corporations or conglomerates that have a proven track record of higher or stable earnings over long periods of time along with good dividend distribution and are often considered to be market pioneers. 

  • Capital gains

The gains arising from selling the equity or debt or other instruments at a profit are known as capital gains. Mutual funds can have short-term or long-term gains based on the period of holding of the instrument class.

  • Close ended funds

Close-ended funds are the mutual fund scheme with a fixed number of units and a defined tenure. The investors can subscribe to the scheme only during the New Fund Offer (NFO) after entering the scheme is not allowed. These funds can be traded like ETFS on secondary markets and based on their NAV and demand-supply forces.

  • Coupon rate 

The rate at which interest is paid to the investor for debt instruments like bonds is known as the coupon rate. It is expressed in terms of a percentage of the face value of the debt instrument. 

  • Debt Funds

Debt funds are the mutual funds that invest predominantly in debt instruments like corporate bonds, government bonds, treasury bills, commercial papers, etc. these funds are relatively less volatile and are best suited for risk averse investors having a long term investment horizon.

  • Diversification

Diversification is the inherent advantage offered by mutual funds. It refers to the spread of risk on account of investment in various assets classes or categories of mutual funds. Theis benefit of diversification provides the investor with potentially higher returns at relatively lower risks.

  • Direct Mutual Funds

Direct Mutual funds are the schemes that are offered by the AMC without the involvement of any third party or distributor or agents or brokers. The expense ratio of such funds is relatively lower as compared to regular plans. The word direct is mentioned in the name of the fund to caution the investors. 

  • Dividend Plan

Dividend Plan is a category of mutual funds based on the investment objectives. These funds provide the investors with regular dividends as power their guidelines for the underlying equity held by them.

  • Entry load

Entry load are the charges levied by the fund house at the time of initial investment by the investor. These charges are no longer applicable to mutual funds in India. 

  • Exit load

Exit loads are the opposite of entry load i.e, the charges levied by the fund house at the time of exit from the fund or redeeming of the units. It is expressed as a percentage of the NAV and is usually applicable when the investor exits the fund within a year from the initial investment.  

  • Expense ratio

Expense ratio is the ratio of the total expenses of the fund and the fund assets. The expenses of the fund like the salary of the fund manager, transaction charges, custodian charges, brokerage, etc. are all pooled together to come to the total expenses of the fund for this purpose.  

  • Fund manager/ Portfolio managers

Fund manager is the person appointed by the AMC to manage the fund. Such a person is in charge of making investment decisions about the fund that result in achieving the investment goals or objectives of the fund and generating returns for the investors.

  • Fund management costs

The charge levied by the AMC for management of the fund is known as the fund management costs.

  • Fund category

Fund category is the classification of the mutual fund based on various categories like equity, debt, ELSS, Hybrid funds, etc.

  • Gilt funds

Gilt funds are the mutual funds that invest exclusively in the government securities of different maturities. These are relatively risk free returns and provide average but stable returns for the investors. 

  • Government securities

Government securities are the securities issued by the Central Government or the State Government. These securities are considered to be risk free securities 

  • Growth funds

Growth funds are different from dividend funds where the returns are reinvested in the fund to generate higher returns. Investors do not get regular dividends like the dividend plan scheme.

  • Index funds

Index funds are a category of mutual funds where the performance of the fund is replicated based on the performance of the underlying index that it tracks. These funds are considered to be passively managed funds and are relatively less risky as compared to regular mutual funds as the pressure to outperform the market or the index is not present. 

  • Inflation Risk

The risk of reduction in  the value of the assets or securities due to the inflation is known as the inflation risk. An ideal mutual fund should provide returns higher than the inflation for the investor wealth to grow. 

  • Indexation

Indexation is the adjustment to the purchase price of the units of the fund on account of inflation. Debt mutual funds get the benefit of indexation on capital gains arising out of long term funds. 

  • Liquid funds

Liquid funds are mutual funds that invest in short term instruments linked to the money market like commercial papers, treasury bills, etc. the main objective of these funds is to provide liquidity while offering moderate returns at minimum risk. 

  • Launch date

Launch date is the date when the mutual fund begins its operations and allows the subscription of its units.

  • Liquidity

Liquidity of the mutual fund is the tradability of the fund i.e., the time taken for an investor to convert their units held into cash by selling them or redeeming them. 

  • Lock-in period

Lock-in period is the minimum investment period offered by the mutual fund. The investors cannot exit the fund or redeem the units held during such lock-in period. 

  • Market risk

Market risk is the risk of loss or volatility that is inherent to any investment product associated with equity or debt instruments. Market risks can be on account of any number of factors like economic, political, manmade or natural disasters, policy changes, etc. 

  • Maturity date

Maturity date is the date at which the amount invested by the investor becomes due or payable to such investor. It is generally applicable in case of close ended funds or debt funds. 

  • Minimum additional investment

Minimum additional investment is the minimum amount of units that have to be purchased by the investor for additional investment in the fund. 

  • Minimum withdrawal

Minimum withdrawal is like the opposite of minimum additional investment where the investor is allowed to make a withdrawal of the minimum number of units at the time of redeeming them at any point of time. 

  • Money market

The market where short term instruments having a maturity of less than one year are traded. These instruments are in the nature of debt instruments like treasury bills, commercial papers, etc.

  • New Fund Offer (NFO)

New fund offer is when the AMC launches a new fund for subscription. In case of close ended funds, subscription can be done only during the NFO period.  

  • Net assets value(NAV)

Net assets value of the mutual funds is the per unit value of the fund at any given point of time. 

  • No load scheme

When mutual funds do not charge any fees or charges for subscription or redemption are known as no load mutual fund schemes. 

  • Nifty

Nifty is the national index that compromises the stocks of 50 top-performing companies of India. It is often used as a key benchmark to measure the performance of mutual funds.

  • Nominee

Nominee is the person nominated by the investor that is entitled to get the assets of the investor upon his/her death. 

  • Offer document/Prospectus

Offer document is the official document issued by the AMC before the launch of the mutual fund scheme detailing various aspects of the fund like the investment objective, expense ratio, fund manager details, policies, etc.

  • Open ended scheme

Open ended scheme is the most favoured type of mutual fund where there is no fixed number of units or restrictions on entry and exit from the fund. 

  • Performance

The performance of any mutual fund is the returns generated by such mutual funds. These returns can be in the form of capital gains or dividends or bonuses issued by the fund. 

  • Record date

Record date is the date at which the investors are registered as unitholders with the scheme post which they become eligible to receive the returns in the form of dividends or interest or capital gains arising from the fund.

  • Redemption fee

Redemption fees are the charges levied on the investors when they redeem the units of the fund.

  • Risk adjusted returns

Risk adjusted returns are the returns generated or expected by the fund after adjusting the risk involved. This is an important parameter to be considered while comparing the returns of two mutual funds having different risk return profiles for potential investment. 

  • Scheme objective

Scheme objective is the purpose or the investment goal of the scheme. It is the responsibility of the fund manager to achieve the scheme objective by making sound investment decisions using their expertise and various other tools at their disposal. 

  • Sector allocation

The allocation of the funds among companies of different sectors is known as sector allocation. These sectors can be Pharma, FMCG, industrial, IT, etc. as per the fund policy or the investment objective.

  • Sector funds

Mutual funds that invest in specific sectors are known as sector funds. These are also known as thematic funds and have high risk return ratio

  • Systematic Investment plans

Systematic investment plan or SIPs are a mode of investment in mutual funds. The investors can invest a smaller amount in the fund at fixed periodic intervals through auto  debits from their designated bank account. 

  • Systematic transfer plans

Systematic Transfer Plans slow the investors to transfer a fixed portion of the fund from one scheme to another at regular intervals.

  • Systematic withdrawal plans

Systematic Withdrawal Plan is when the investor can redeem a fixed amount from the fund at periodic intervals. Such a request for SWP has to be notified by the investor at the time of making the initial investment.

  • Total assets under management

This is the market value of the total assets or investments under the management of the fund at any particular date.

  • Turnover rate

Turnover rate is the rate at which the underlying securities of the fund have changed . A higher turnover rate reflects that the underlying assets of the fund have changed significantly and it will also result in higher expense ratio. This may lead to a reduction in the value of the units of the fund.

  • Unitholder

A unitholder is the person or investor holding the unit of the mutual fund i.e., having the unit in their name.

  • Yield to maturity 

It is the measure of the returns that are to be received by the investors if the asset (generally a long term debt instrument providing interest) is held by the investors till it’s maturity. This measure considers many factors like coupon rate, maturity period, redemption value, etc. to determine the yield to maturity.

  • Zero coupon bonds

Zero coupon Bond is a form of a debt instrument where there is no payment of periodic interest. The bond is sold  at a discount but the value of the bond increases gradually over time. The earnings on the bond are accumulated over the tenure of the bond and it can be redeemed at its face value. 

Conclusion

These were some of the basic terms that are commonly used while referring to a mutual fund. Investors have to know all the terms and conditions before investing in any fund and can take help from the fund manager or the portfolio manager to get a better idea in case of any confusion. 

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