Often we have received queries from our readers and users asking us information on different terms used in the industry in a very simplified manner. In this blog, I seek to address these concerns of our readers. In this article, I attempt to capture all the jargons that are used in the industry and have tried to explain it in simple terms using examples.
In this article
- Account Statement
- Adjusted NAV
- Age of Fund
- Alpha Coefficient
- Annual Return
- Annualized Returns
- Applicable NAV
- Asset Allocation
- Asset Management Company (AMC)
- Average cost method
- Average Credit Quality
- Balance Maturity Tenure Of A Scheme
- Balanced Funds
- Bear Market
- Blue Chip Stock
- BSE Index
- Bull Market
- Capital Gains
- Certificates of Deposit
- Close-Ended Schemes
- Commercial Paper
- Cost of Churning/Turnover cost
- Coupon rate
- Current Load
- Current Yield
- Cut-off Time
- Debt/Income Funds
- Dividend Distribution Tax
- Dividend Frequency
- Dividend History
- Dividend Per Unit
- Dividend Plan
- Dividend Reinvestment
- Dividend Warrant
- Dividend Yield
- Entry Load
- Equity Linked Savings Scheme
- Ex-Dividend Date
- Ex-Dividend NAV
- Exit Load
- Expense Ratio
- Face Value
- Fund Category
- Fund Family
- Fund Management Costs
- Fund Manager
- Gilt funds
- Gilts/Government Securities
- Growth scheme
- Guaranteed Returns
- Income / Debt Funds
- Index Funds
- Inflation Risk
- International Funds / Emerging Market Funds
- Investment Management
- Investment objective
- Investment strategy
- Key Information Memorandum (KIM)
- Launch Date
- Liquid Funds /Money Market Funds
- Lock-In Period
- Management Expense Ratio
- Management Fee/Expense
- Market Risk
- Maturity or Maturity Date
- Minimum Additional Investment
- Minimum Subscription
- Minimum Withdrawal
- Money Market
- Money Market Instruments
- Mutual Funds
- Net asset value (NAV)
- No-Load Mutual Fund or No-Load Scheme
- Non-Performing Investments
- Objective Of Investment
- Offer Document or Prospectus
- Open-End Scheme
- Opening NAV
- Portfolio Managers
- Purchase Price or Offering Price
- Record Date
- Recurring Investment Facility
- Redemption Fee
- Redemption Of Units
- Redemption Price
- Risk-Adjusted Returns
- Scheme Information Document (SID)
- Scheme Objective
- Sector Allocation
- Sector Funds
- Sharpe Ratio
- Standard Deviation
- Systematic Investment Plan (SIP)/ Recurring invest
- Systematic Transfer Program (STP)
- Systematic Withdrawal Plan (SWP)
- Total Assets Under Management
- Total Return
- Turnover Rate
- Unit Trust
- Value Stocks
- Yield Curve
- Yield To Maturity
- Zero-Coupon Bond
An account statement is a statement showing details regarding all the mutual fund holdings within a fund house of an investor. The statement details all the transactions executed by an investor during a period. The statement includes information such as NAV (Net Asset Value) date, NAV value, market value, etc.
The Net Asset Value of a unit is the Market value of mutual fund securities minus liabilities divided by the total number of shares/units outstanding. The NAV is said to be “adjusted” when there is a dividend involved.
Assume there is a fund with NAV of 100 on Jan 1, 2018. The fund paid Rs 10 as dividends during the year, and the closing NAV was Rs 150 on Dec 31, 2018. If you calculate the returns by NAV method, it would be –
But you have also received divided which is not getting reflected in the returns. So, adjusted NAV adjusts for such actions. Actual performance of the fund is based on an adjusted NAV method –
= (150+10)-100 / 100
Age of Fund
Age of the fund is the total time elapsed since the launch of the fund. For example, the well known Aditya Birla Sun Life Equity Tax Relief 96 Fund was incepted on xx. Thus, the age of the fund is xx as on date. A higher age of fund shows the track record of a fund.
Alpha is the excess return over the standard benchmark of a fund. Each fund tries to assess its performance concerning a reference. This benchmark may be any regular index or may be customized based on the fund structure. Thus, the alpha is the returns that are generated over and above the benchmark.
A positive alpha indicates better performance of funds than the benchmark, whereas a negative alpha indicates an underperformance of the fund when compared to the benchmark.
An annual return is the percentage change in the NAV of a fund over one year. Depending on the need of the investor, the annual return may or may not include dividends and bonus that may be paid in a fund.
It is the absolute return over a period that may be either higher or lower than a year. The returns are aggregated to a period of one year based on the run performance during the period.
In 2005 the Sensex opened at xx, and in 2018 the Sensex closed at xx. During 13 years, the Sensex gained xx%, the same growth can be said as xx% annualized to give a clear picture.
Applicable NAV is used to process the buy and sell fund units. The fund houses in the industry have outlined a cut-off time for different types of funds. This cut-off time allows the fund house to execute a purchase or sale. If an application is submitted before the cut-off time, the processing from the fund house happens the same day.
Asset allocation is the process of diversifying the risk in a portfolio or fund. The method involves the distribution of fund corpus into different instruments such as stocks, bonds, debentures, etc. depending on the fund objective in terms of risk and return.
Asset Management Company (AMC)
It is the investment manager for a fund. AMC is a company set up for managing the investment of mutual funds, make investment decisions as per the objective, deed of Trust, and other activities as per the Investment Management Agreement.
Average cost method
The method takes into account the total cost incurred in purchasing all units of investment and dividing by the total number of units allocated.
You invested twice in a fund by putting in Rs 25000 each time. During the transactions, you received 100 and 110 units respectively in both the transaction. Thus, the average cost of purchase is Rs 238.09, computed as below –
= total investment value / total units received
= (25000 + 25000/ (110+100)
= Rs 238.09
Average Credit Quality
The Average Credit quality measures the creditworthiness of debt securities held by a fund. It is computed using the weighted average method by taking into account each security, its credit quality, and weight in the portfolio. The fund manager refers to the credit rating table for the same. Also, any instrument of the government or cash is considered as AAA rating during the remainder as per their rating.
Balance Maturity Tenure Of A Scheme
It is used in close-ended schemes and is referred to as the balance term remaining until the redemption of the scheme.
Balanced Fund is a type of mutual fund that invests in both asset class – equity and debt. These funds belong to a hybrid category and generally comprise of two-third equity portion and the remainder in debt.
The period in which the market correct continuously as the investors/market participants are on a selling spree. This activity results in a declining share price over a stretched period.
Benchmark is the platform or the parameter which is considered as base. Also, termed as a reference, a benchmark sets the minimum expectation of returns for an investor and fund manager. A fund is then compared concerning this benchmark and positioned accordingly based on the outperformance.
Mirae Asset India Equity Fund is a large-cap fund that primarily invests in large-cap companies. The benchmark is Nifty 100 TRI. Thus, the fund is compared with this benchmark while assessing its suitability for an investor.
Beta measures the sensitivity of a stock or a fund with the market. Every instrument be it stock, or a fund behaves in tandem to the overall market. This association of the instrument and the market is determined by beta. The market is assigned a beta of 1 as a reference.
If a fund has a beta of 1.2, it means that the fund’s performance will be intensified concerning market by 20%. This means if the market increases by 100 point, the fund increases 120 points (1.2 x 100).
Thus, the higher is the beta, the more sensitive is the stock or fund relative to the market. Also, note that high beta stocks are not good always and bring in higher risk.
Blue Chip Stock
Bluechip stocks are the stocks of a large corporation with a track record of stable earnings, dividend distribution, and strong brand recall.
Some of the bluechip stocks in India are Reliance Industries, Tata Consultancy Services, Hindustan Unilever, etc. Also, bluechip stocks of the US are Apple Inc., Alphabet Inc., Amazon Inc., etc.
Bond is a financial instrument that bears a promise of paying interest to the investor (also known as lenders). Moreover, these instruments promised to pay a specified sum of money due on a specific date (maturity date) in the future.
It is the allocation of additional units to investors based on their holding. In simple words, a bonus is the corporation action by way of which the price of each unit of NAV is reduced and the number of units an investor holds increase by the corresponding ratio to ensure the portfolio value remains same before and after bonus.
A Broker is an intermediary who helps/guides an investor on different avenues of investment available. It also facilitates the process of investment. Some of the notable brokers in India are – Zerodha, Five Paisa, Motilal Oswal, Angel Broking, etc.
It is the fee that is paid to the broker for the service provided. For example, in the case of mutual funds, brokers act as distributors and sell units of the fund on behalf of the fund house. Thus, the fund house pays a brokerage (usually a percentage of the transaction value) to the broker for getting investments from investors.
It is an index that reflects the price of the 30 companies that are listed on the Bombay Stock Exchange (BSE). These 30 companies are usually the largest companies in the index and provide a good representation of the overall market movement. Also known as Sensex or Sensitive Index, the index is considered as a common benchmark for evaluating funds.
The period during which the price of stock keeps rising, and investors/participants are on a continuous buying spree. The period generally results in a rising price for the shares.
Capital gains are the profit realized upon the sale of securities, and other capital assets such as mutual fund units. These gains are classified as short-term capital gain or long-term capital gain depending on the period of holding the instrument.
In general, a period of over 12 months is considered as long-term. However, the definition differs for certain asset classes such as debt funds, etc. Also, based on the category of the capital gain, a tax may or may not be levied.
Certificates of Deposit
Certificates of Deposit (CD) is issued by scheduled commercial banks except for the regional rural bank. These are unsecured promissory notes with a maturity varying from 91 days to three years depending on the issuer.
Close-ended schemes are mutual fund schemes that have a defined maturity period. An investor can invest in such schemes only during the first issue. An investor can exit the invest by two-manner – either at maturity of the scheme or by selling the units if the scheme is listed on a stock exchange. The selling price in the case of listing could differ from the NAV due to the demand and supply of units on the exchange.
In addition to the two exit options, some of the close-ended schemes also provide the option of buying back. In this circumstance, the fund house opens a buyback window win which an investor may decide to liquidate his/her investment. The regulation from market regulator SEBI mandates that the fund house provides at least one of the two exit options to investors.
Commercial paper (CP) is a short-term, unsecured investment instrument that is issued by public and private corporations. The proceeds from the issue are generally used to meet the working capital requirement. Maturity of such instruments varies between 91 days to 365 days usually.
Corpus is the total amount of money invested by all investors in a scheme. For example, Aditya Birla Sun Life Tax Relief 96 Fund has a corpus of Rs 8913 crores as of May 31, 2019.
Cost of Churning/Turnover cost
It is the cost incurred when changes are made to a portfolio. The changes include buying and selling of securities. The costs involved are broker fees, custodian charges, transaction fees, registration fees, stamp duty, and the likes.
It is the annual rate of interest payable on a debt security. It is commonly expressed as a percentage of the face value of the debt instrument.
If a company issues debt instruments of Rs 100 (face value) and pays Rs 8 as interest annually. The instrument is then expressed as 8 percent coupon.
It is the load structure that applies to a fund currently. The load is nothing but the fee charged by a fund house when an investor subscribes or redeems units of a fund.
Current Yield is the ratio of interest to the current market price of the bond. Usually expressed in percentage, it is computed as –
Current yield = Annual interest / Current market price
If a bond of Rs 100 face value, 8% coupon paid annually, is currently priced at Rs 120, the yield is computed to be 6.67%.
= ((8% x 100)/ 120)*100
Custodian is similar to a bank. Like a bank keeps the valuables and deposits of individuals, custodian keeps the securities and other assets of investors.
All the transaction in a mutual fund that is regulated by SEBI, is processed at a particular NAV. Every fund has a defined cut-off time which enables the fund house to process transactions properly.
Thus, the cut-off time is the time before which any transaction made by an investor in the fund is executed the same day. The trades placed post-cut-off time are completed the next day at the next day’s NAV.
Mutual funds that invest in debt instruments are debt/income funds. The debt instruments include corporate debentures, bonds of public sector undertaking (PSU), Gilt funds, treasury bills, commercial papers, corporate deposits, certificates of deposits, etc.
These funds are less risky owing to the fixed income nature of the instruments and are preferred instruments by risk-averse investors.
Also read: Best Debt Fund To Consider Investing In 2019
When the market price of a scheme goes below the actual NAV of the unit, the scheme is said to be available at a discount.
Diversification, in simple words, is spreading risk. A mutual fund spread its risk by investing in multiple securities and asset classes. An investor also diversifies his/her risk by creating a portfolio of various funds so that the investment amount is not concentrated into one fund and the investor can see the benefit coming from other funds in the event one fund doesn’t perform as expected.
Dividend Distribution Tax
Dividend Distribution Tax or the DDT is the tax payable by a mutual fund while distributing a dividend to the unitholders.
The periodicity of dividend payout is the dividend frequency. The terminology is more relevant in case of income/debt schemes such as the monthly income plan, etc.
These plans generally pay a dividend every month and are preferred by retired individuals who are looking for monthly cash flow to meet needs.
It is the track record of the dividend paid by a fund.
Dividend Per Unit
It is the total amount of dividend declared by a fund divided by the total number of units issued to investors.
It is a mutual fund plan under which the fund house pays divided time to time as and when decided by the management of the fund.
It is a mutual fund plan under which the dividend declared by the fund house for a particular scheme is re-invested in the scheme itself. In this case, the dividend is not paid to the investor; instead, the investors receive scheme units of the equivalent value. The NAV used to compute the number of units is Ex-dividend NAV.
It is an instrument that is issued by companies or fund houses for payment of dividends.
Dividend Yield refers to the dividend earned per unit of the scheme as a percent of the current price.
It is computed as –
Dividend yield = (Dividend per unit / current market price per unit) x 100
A dividend is a portion of the profit that is distributed to investors periodically. Paying dividends is not mandatory and is at the sole discretion of the management of the fund.
The dividend paid is not taxable in the hands of the investor; however, the fund house paying the divided has to pay DDT.
It is the charges that are levied by a fund house when an investor invests in a scheme — the applicability of entry load results in a rising cost per unit. Entry load is not applicable in India anymore.
Equity Linked Savings Scheme
Equity Linked Savings Scheme (ELSS) is a type of equity mutual fund that invests in equity shares of companies. This mutual fund comes with a lock-in period of three years and provides tax benefits under section 80C of the Income Tax Act.
An individual can save up to a maximum of Rs 1.5 lakh annually by investing in ELSS products.
It is the date since which dividend distribution is effective. Whenever a fund pays a dividend, the NAV of the fund reduces by the amount equivalent to that of the dividend.
The NAV after a fund declares the dividend is known as Ex-Dividend NAV. Whenever a fund pays a dividend, the NAV of the fund reduces by the amount equivalent to that of the dividend and the resultant value is known as Ex-Dividend NAV.
It is the charge that is levied by a fund house when an investor redeems his/her investment from the fund. Collecting the charges while redemption results in the lowering of the NAV. Exit load is commonly expressed as a percentage of NAV.
Managing a mutual fund involves multiple expenses such as management fees, transaction charges, custodian fees, the salary of the fund manager and the research team, data subscription charges, brokerage, and the likes. All these expenses, when combined, give the total expenses of a fund. Total expenses, when divided by the fund’s assets, gives the expense ratio.
A high expense ratio shows that the expense incurred towards managing the fund is high; this results in lowering of the returns.
It is the original price of a unit of a scheme. Typically the face value is Rs 10 in India for the majority of the schemes.
Depending on the assets in a mutual fund, the funds are categorized into different categories. This categorization makes it easier for an investor and a fund manager to compare a fund with the category average and its peers. The market regulator SEBI has tightened its guidelines surrounding the categorization of the funds. Some of the categories are – Equity: Large Cap, Equity: Multi-cap, Equity: ELSS, Equity: Small-cap, Hybrid: Aggressive, Hybrid: Balanced, etc.
Like a family represents a member who is generally blood relatives of each other. Similarly, a fund family is all the schemes that are managed by one mutual fund.
Fund Management Costs
Every AMC levies a charge for the management of the fund. This charge is called the fund management cost.
A fund manager is a person who is appointed by the AMC to manage/take care of a fund. The fund manager is empowered to make decisions concerning the portfolio in the best interest of the investor and as per the objective of the fund.
Mutual funds that invest only in government securities of varying maturities are Gilt Funds. These funds generally do not contain any risk owing to the sovereign rating of the instruments. These funds provide an average return and are suitable for investors willing to take part in the nation-building activity and are risk-averse.
Securities that are issued by the Central Government and the State Government are known as Gilts. These securities have a sovereign rating as they are guaranteed by the government. Thus, the risk involved is negligible.
A scheme where investments are primarily made in equity and related instruments and the capital gain is used for further investments to grow the NAV. These schemes do not provide a regular dividend to the investor.
The return that is assured by the fund house is known as guaranteed returns. This is applicable in certain income plans that comprise of debt instruments. Launching such schemes is not easy and is heavily regulated by the SEBI.
Income / Debt Funds
The funds that primarily invest in fixed income securities are known as Income / Debt Funds. These funds seek to provide reasonable returns with low risk as the instruments are fixed-income instruments with high credit rating.
Mutual funds that are constructed to mirror the performance of an index are called index funds. These funds provide flexibility to an investor who is willing to invest in indices such as S&P BSE Sensex. Some of the index funds are – UTI Nifty Index Fund, HDFC Index Nifty 50, Franklin India Index Fund, NSE Nifty Plan.
It is a method used to adjust the income by using a price index. This is done to maintain the purchasing power of the public after inflation. The government specifies the use of an index linked to the wholesale price index.
The method of computing is –
(Original price x CII for the year of sale) / CII for the year of purchase
CII is nothing but the Cost Inflation Index.
For a scheme purchased in 2003 (year of purchase) for Rs. 100 and sold in 2018 (year of sale), the cost price after indexation is computed as below –
= 100 * (230/105)
Assuming the index for the year of the sale, and year of purchase is 230 and 105 respectively.
Indexation benefit is available only if the asset is held for more than 12 months.
It is defined as the rise in the price of goods and services over time.
For example, milk was available at Rs 25 in 2008, and currently, it is priced at Rs 40 per liter. This increment in price is nothing but inflation.
The risk related to the value of assets shrinking due to the shrinking of the currency value is known as inflation risk. It is majorly used in analyzing the debt funds and its viability, and also it helps while assessing the attractiveness of a fund. Ideally, an investment should grow more than the inflation rate to enable an investor to accumulate capital. For example, a product X that is price Rs 100 today will be priced Rs 105 tomorrow. Thus, if an investor is investing Rs 100 today, he should get more than Rs 105 tomorrow to meet his need for product X and also to save the remainder.
International Funds / Emerging Market Funds
The funds that invest in the asses of companies/organizations in an emerging economy is called international fund/emerging market fund.
These are not permissible in India due to regulations against investing abroad. Most of the schemes of Foreign Institutional Investors (FII’s) investing in India are funds of this type.
It the method of investment analysis and execution of the plans while keeping in mind the objective of investing.
The purpose of investment of a mutual fund scheme is known as an investment objective.
The guidelines or the framework a fund seeks to follow while investing money pooled by investors is known as an investment strategy.
Key Information Memorandum (KIM)
KIM is the official document that is issued by mutual funds before launching any fund. The document details the characteristics of the proposed fund to its prospective investors. The document also contains the information required by SEBI such as investment objective, investment policy, philosophy, fees, etc.
The date on which a scheme is first made available for subscription is called the launch date.
For example, the launch date for Mirae Asset India Equity Fund is xx.
Liquid Funds /Money Market Funds
The funds that invest only in short-term money market instruments such as commercial paper, treasury bills, and certificates of deposit is known as Liquid Fund. The objective of such funds is to provide liquidity, offer moderate returns while minimizing risk by providing capital preservation. Liquid funds are primarily used for cash management purpose.
Some of the best liquid funds are – Axis Liquid Fund, Indiabulls Liquid Fund, Principal Cash Management Fund, L&T Liquid Fund.
The assets, namely cash, and cash equivalents, that are available instantly and quickly to meet the expenses. It refers to the ability to convert an asset into cash immediately.
A charge, as a percentage of NAV, that may be levied by the fund house at the time of investing in the scheme or redeeming the investment is called load.
The period during which the fresh investments made by an investor cannot be redeemed.
The lock-in period in ELSS is three years. This means that investment made in ELSS on Jan 1, 2019, cannot be redeemed before Jan 1, 2022.
Management Expense Ratio
The ratio of the management expense to the total funds under management is the management expense ratio. The number is usually specified in the offer document of the fund scheme.
It is the charge that is incurred towards the supervision and management of the portfolio. It is generally expressed as a percentage of total funds in the scheme.
The risk that is posed by the market itself is called the market risk. This refers to the risk of price volatility of security due to economic, political, or other market conditions.
Maturity or Maturity Date
The date on which a fund scheme becomes due and payable to the investor is called the maturity date. It is generally applicable in case of close-ended schemes.
Minimum Additional Investment
It is the minimum investment an investor needs to make for purchasing additional fresh units.
It is the minimum amount required to be invested in purchasing units of a mutual fund scheme.
For SBI Bluechip Fund, the minimum subscription is Rs 5000.
This is the minimal amount (smallest amount) that is allowed to be withdrawn (redemption) from a fund at one time.
The market for very short-term securities is known as the money market. The instruments are debt instruments that have a maturity of less than one year. Some of the instruments are Treasury Bills and the likes.
Money Market Instruments
The instruments of the money market are known as money market instruments. The instruments include Commercial Papers, Treasury Bills, GOI Securities, etc. with a maturity of less than one year.
An investment company that pools money from different investors and invest the money in varied securities such as stocks, bonds, and money-market instruments is called mutual fund. This pooled investment is managed by a team of professionals under the leadership of a fund manager or a portfolio manager.
Net asset value (NAV)
The value of the fund’s portfolio arrived at by subtracting the current liabilities from the market value of the fund’s portfolio is known as NAV. The NAV is generally computed daily or weekly unless other specified.
Nifty, often known as National Fifty, is an index that comprises of fifty large stocks listed on the National Stock Exchange. It is regarded as one of the key benchmarks in the industry.
No-Load Mutual Fund or No-Load Scheme
The funds that do not charge any fees for subscription or redemption are known as a no-load mutual fund or no-load scheme.
Read More: 10 Debt Funds With No Exit Load
The person or persons to whom the asset of an investor is transferred upon the death of the investor. The person may or may not be a family member.
This is a part of the portfolio that is not making an interest payment or principal repayment in a timely manner. The scenario is prevalent in debt funds. SEBI has now come up with a valuation methodology that shall help investors.
Objective Of Investment
The purpose statement consisting of the goal and the avenues of investment released by the fund.
Offer Document or Prospectus
It is the official document issued by mutual funds before the launch of a fund describing the characteristics of the proposed fund to all its prospective investors. It contains the information required by SEBI about issues such as investment objectives and policies, services, and fees.
A mutual fund scheme where the purchase and sale of units are allowed continually.
Read More: Open Ended Vs Close Ended Schemes
Opening NAV is the NAV that is disclosed by the fund for the first time after its new fund offer (NFO) closes.
The designated day on which the securities and funds are paid to the members by clearinghouse of the exchange.
The performance is the returns generated from an investment. The returns can be in the form of gain in the value of the asset or by way of dividend paid by fund houses or also in the form of bonus issued.
It refers to the total investment holdings of the fund.
Also known as the fund manager, a portfolio manager is a specialist employed by an AMC to manager a scheme. It is the discretion of the fund manager at the end regarding the securities in which a fund invests. A fund manager is responsible for working in the best interest of the investor while keeping in mind the investment objective of the fund.
Premium is the condition where the market price of a unit is higher than its actual NAV. In such instances, the unit is said to be trading in premium.
A prospectus is an offer document using which a mutual fund invites the public for subscription to the units of the scheme. The document captures all the information about the fund, including the profile of the fund manager and his/her team. The prospectus is aimed at providing a prospective investor with all the relevant information that may help in making an informed decision.
Purchase Price or Offering Price
It is the price at which a fund’s units can be purchased. The asked or offering price is the net asset value per unit plus sales charges if applicable.
A rating is a symbol that works as an indicator of the current opinion, of the capability of timely servicing the debt obligation. The rating is arrived using an objective framework depending on the financials of a company and the information taken from the management about the operations of a company. The rating is carried out to assess the creditworthiness of debt instruments, and/or risk of loss in an investment.
The date by which the investors are registered unitholders to be eligible to receive any future dividend and/or capital gains distribution.
Recurring Investment Facility
It is an arrangement provided by the fund house where the regular purchase of a small or large number of units is allowed. The plan also may provide for automatic reinvestment of dividend and/or capital gains distribution.
The fee that is levied as a back-end load and is imposed when an investor redeems his/her investment is known as redemption fee.
Redemption Of Units
Buying back or cancellation of the units by a fund is known as redemption. The investor is paid a consideration at the time of redemption, which is linked to the NAV of the scheme.
The price at which open-ended schemes repurchase its units and close-ended schemes redeem its units upon maturity. These prices are determined using NAV.
The returns expected from an investment after adjusting for the risk involved in it is known as a risk-adjusted return. The parameter is primarily used to compare two investment options, particularly with different risk/return profiles.
Risk-free is the absence of credit risk. These are investment instruments where there is a guaranteed assurance of returns. Typically, government securities or securities that are backed/guaranteed by the government are considered risk-free.
‘r’ is the correlation coefficient. The square of the same is known as R-squared. The statistic shows the proportion of the determined variables that are explained by others.
If the correlation between crop yield and rainfall is 0.7, then the R-squared is 0.7×0.7 = 0.49. This means 49% of the behavior of food crop production is explained by rainfall while the remainder is explained by other factors.
A higher R-squared is considered to be a good explanatory factor for the changes in the element being explained. In a situation, this figure is not high; it indicates that there are other factors that better explain the behavior of the variable in question.
Scheme Information Document (SID)
SID is an official document that is issued by mutual funds before the launch of a scheme. The document captures the characteristics of the proposed fund. The document is generally used by prospective investors to make an informed decision about investing. The document contains information that is made mandatory by the SEBI. This includes information such as investment objectives, investment philosophy, services, fees, and the likes.
The document may also contain other information that may be relevant for the investor.
The objective is nothing but the purpose statement/goal of the fund. The fund seeks to achieve this goal with the help of the investment instruments held in it.
Sector allocation refers to the proportion of the fund that is invested in the companies of different sectors of the economy, such as Industrials, Materials, Consumer Durables, etc.
The sector allocation for SBI Bluechip Fund is shown as below –
Sector Funds are the mutual funds that invest in specific sectors of the economy such as pharmaceuticals, information technology, and the likes. These funds generally come with higher risk and compensate with high returns. These funds are also known as thematic funds and plays on the theme that is the flavor of the economy.
Typically an instrument either debt or equity in a corporation in which a person invests is considered as a security. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidence of indebtedness or ownership.
Sharpe ratio measures the risk-adjusted returns of a fund. In simple words, the ratio measures the variability of excess returns (excess return is defined as the returns over the risk-free rate). The formula for Sharpe ratio takes into consideration the fund’s returns over a risk-free investment and divides the same by the standard deviation of returns.
Mathematically it is shown as –
Sharpe ratio = (R- Rf)/SD
R= Return on the investment instrument
Rf = Risk-free returns
SD = Standard Deviation of investment instrument
Assume a fund that generates 18% annual return at a standard deviation of 6%. Considering the risk free rate at 8%, the Sharpe ratio is calculated as –
The higher is the Sharpe ratio, the better is the fund. In the simplest language, the ratio shows how much additional return an investor can expect for every degree of risk.
A sponsor is a person who, acting alone or in combination with another body or corporate, establishes a mutual fund and applies to SEBI for its registration. The sponsor is also closely associated with the AMC. As per SEBI regulations, the sponsor has to contribute a minimum of 40% of the net worth of the AMC.
The standard deviation is one of the most commonly used statistics used for assessing risk. The ratio measures the tendency of an instrument to deviate from its average returns. A low standard deviation is better and shows higher consistency in the performance of the instrument, which is closer to the average returns.
Systematic Investment Plan (SIP)/ Recurring invest
SIP is a program that allows an investor to invest in a mutual fund at every interval (usually monthly or quarterly). On the specified date, the amount is auto-debited from the bank account of the investor and additional units equivalent to the amount invested is allotted to the investor.
Check Out : SIP Calculator
Systematic Transfer Program (STP)
STP is a plan that allows an investor to instruct the fund to transfer a certain amount from one scheme to another at regular intervals.
Systematic Withdrawal Plan (SWP)
SWP is a plan that enables an investor to withdraw a fixed amount at a regular interval (monthly, bi-monthly, or quarterly). The withdrawal is as per the requirement of the investor as specified by him/ her at the time of investment.
Check Out: SWP ( Systematic Withdrawal Plan) Calculator
Total Assets Under Management
It is the total market value of all the investments of a fund as on a particular date.
For HDFC Balanced Advantage Fund, the total assets under management are Rs 43,168 crore as on June 30, 2019.
It is the return on investment that is computed after taking into account capital appreciation, dividends, interest, and individual tax consideration adjusted for present value. The performance is generally expressed on an annual basis.
A trust is a legal arrangement under which property and assets may be held and managed for the benefit of another person. The mutual funds in India are registered under the Trusts Act.
A person or a group of people who have overall supervisory authority over the fund manager is known as the trustee. Trustees ensure that the fund managers keep to the deed and that the unit price of the fund is fairly calculated and the assets of the fund are held safely.
Turnover is the extent to which a fund’s portfolio is changed during a year. A high turnover indicates that the number of securities in the fund has changed significantly. This also shows higher investment expenses, which may lead to erosion of the value of the units.
The turnover rate is the measure of the fund’s trading activity. It is computed by dividing total purchases or sales in a portfolio by the fund’ss net assets during a period.
A unit represents one divided share of an asset/scheme.
A person who holds unit(s) in his/her name is known as the unitholder.
A unit trust is a special type of bond fund that has a fixed portfolio. The shares or the “units” in such a portfolio is sold at the time of the constitution of the fund.
The portfolio remains the same for the fund until the maturity of the underlying securities in the portfolio.
Stocks that are found to be undervalued when valued using different valuation methods are known as value stocks. These stocks tend to perform well if held for a long-term horizon.
The valuation method used varies depending on the analyst, but the common ones are price-to-book (P/B), price-to-earnings (P/E) or the discounted cash flow (DCF).
Value stocks tend to have lower P/E and P/B than the industry average.
Yield is the distributions from investment income. It is expressed as a percentage of the NAV or the current market price. Unlike total return, the yield has only one component, which is the investment income. It does not include the distribution of capital gains or capital appreciation of underlying shares.
The graphical representation between yield and maturity time is known as the Yield Curve. The yield curve shows the yield of fixed-income securities such as bonds, treasury bills, etc. with varying maturity.
The curve is generally sloped upwards as the instruments with longer maturities usually have higher yields.
Yield To Maturity
Yield to Maturity (YTM) is used to determine the return an investor tends to receive if a long-term, interest-bearing investment such as a bond is held until maturity.
YTM takes into consideration the purchase price, redemption value, time to maturity, coupon value, and coupon payment frequency.
It is a bond where there is no periodic interest that is paid to an investor. These bonds are sold at a discounted price to its fair value to the investor. This discount becomes the return for the investor. In such bonds, the investor receives only one payment upon maturity. In a straightforward manner,
FV = SP + Interest
where FV is the face value of the bond, SP is the Selling price to the investor.
An investor buys the bond at SP and receives FV upon maturity.
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Disclaimer: The views expressed in this post are that of the author and not those of Groww