Term for mutual fund

Important Terms related to Mutual Funds in India

1. Arbitrage Fund

Definition: Arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. These funds are hybrid in nature as they have the provision of investing a sizeable portion of the portfolio in debt markets.

Description: Arbitrage funds are the panacea for low risk taking investors. In a situation of high and persistent volatility, arbitrage funds provide investors a safe avenue to park their hard earned money. These funds capitalize on the market inefficiencies and generate profits for the investors. As these funds
invest predominantly in equities, their tax treatment is at par with equity funds.

2. Benchmark

Definition: A benchmark is an unmanaged group of securities which are considered as a benchmark to measure a funds/stocks performance. Benchmarks are generally broad market indices like BSE Sensex, CNX
Nifty of the Indian stock market with which mutual fund returns are compared.

Description: If a fund returned 59% in a particular year, but the benchmark Sensex returned 70%, this infers the fund underperformed compared to the Sensex benchmark.
A benchmark indicates directly the fund managers performance. For instance, a mutual fund which outperforms the benchmark is a sign of an efficient fund manager.

3. Benchmark Government Bond

Definition: Benchmark government bond is a debt security issued by the Central government with a residual maturity of 10 years.

Description: This bond is backed by sovereign guarantee. Hence investors dont face any default risk. At the maturity of one benchmark sovereign bond, another one with the same residual maturity is issued by the
Central government.

The coupon rate is decided by way of auction. This bond has the highest liquidity amongst similar maturity bonds. Once fixed, the coupon rate remains constant throughout the term of the bond. Only the yieldchanges commensurate with the interest rates and accordingly the price of the bond changes. There exists an inverse relationship between the bond yield and its price.

4. Closed-ended Funds

Definition: The unit capital of closed-ended funds is fixed and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over.

Description: This means that new investors cannot enter, nor can the existing investors exit till the term of the scheme ends. However, to provide a platform for investors to exit before the term, the fund houses list 

their closed-ended schemes on a stock exchange.

Trading on a stock exchange enables investors to buy and sell units through a broker in the same manner as transacting the shares of a company. The units may trade at a premium or discount to the NAV depending on the investors expectations of the funds future performance and prospects.

The demand and supply of fund units and other market factors also affect their price.The number of outstanding units of a closed-ended fund does not change as a result of trading on the stock exchange. Apart from listing on an exchange, these funds sometimes offer to buy back the units, thus offering another avenue for liquidity. Sebi regulations ensure that closed-ended funds provide at least one
of the two avenues to investors for entering or exiting.
The closed-ended funds are free from the worry of regular and sudden redemption and their fund
managers are not worried about the fund size.

5. Credit Rating

Definition: Credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past.

Description: Usually, is in the form of a detailed report based on the financial history of borrowing or
lending and credit worthiness of the entity or the person obtained from the statements of its assets and liabilities with an aim to determine their ability to meet the debt obligations. It helps in assessment of the solvency of the particular entity. These ratings based on detailed analysis are published by various credit rating agencies like Standard & Poors, Moodys Investors Service, and ICRA, to name a few.

6. Debt Funds

Definition: Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills.
Gilt fund, monthly income plans (MIPs), short term plans (STPs), liquid funds, and fixed maturity plans
(FMPs) are some of the investment options in debt funds. Apart from these categories, debt funds include various funds investing in short term, medium term and long term bonds.

Description: Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. A debt fund provides a steady but low income relative to equity. It is comparatively less volatile.

7. Duration

Definition: As the term suggests, it is expressed in the form of number of years and measures a bonds
sensitivity to change in interest rates. To be specific, it measures the change in market value of security
due to 1% change in interest rates.

Description: Usually, the higher the duration, the more is the volatility in the prices. In other words, it is the number of years required to get the present value of future payments from a security/bond.

8. Entry Load

Definition: Mutual fund companies collect an amount from investors when they join or leave a scheme.
This fee is generally referred to as a load. Entry load can be said to be the amount or fee charged from an investor while entering a scheme or joining the company as an investor.

Description: Generally, an entry load is collected to cover costs of distribution by the company. Different mutual funds houses charge different fees as an entry load. In India, this charge was usually of about 2.25% of the value of investment. From August 2009, however, SEBI has done away with this practice of charging entry load for mutual funds.

9. Exit Load

Definition: Mutual funds companies collect an amount from investors when they join or leave a scheme.
This fee charged is generally referred to as a load. Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or the company as an investor.

Description: The aim behind the collection of this commission at the time investors exit the scheme is to discourage them from doing so, i.e. to reduce the number of withdrawals by the investors from the
schemes of mutual funds. Different mutual funds houses charge different fees as an exit load.

10. Treasury Bills

Definition: These are government bonds or debt securities with maturity of less than a year.

Description: T- bills are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities.

11. Trustee

Definition: Trustee is an individual who is responsible for a property or an organization on behalf of some other individual or a third party.

Description: Trustee is supposed to make profitable decision for the entity under it authorization. It is a
legal relationship between the trustee and the party, where the trustee is totally responsible for the
maintenance, performance, and profitability of the trust under his guidance. Usually the trustee is not to make any profits, for himself, using the resources of the trust.

12. Ultra Short Term Funds

Definition: Ultra short-term funds invest in fixed-income instruments which are mostly liquid and have short-term maturities.

Description: Ultra short-term funds help investors avoid interest rate risks, yet they are riskier and offer
better returns than most money market instruments. Liquid and ultra short-term funds are similar on
various lines, yet there are differences between a liquid fund and an ultra short-term fund.

13. Yield To Maturity

Definition: It is also known as redemption yield. As the name suggests, if an investment is held till its
maturity date, the rate of return that it will generate will be Yield to Maturity.

Description: Calculation of YTM is a complex process which takes into account the following key factors:
1. Current Market Price
2. Par Value
3. Coupon Interest Rate
4. Time to maturity

14. Systematic Investment Plan

Definition: Systematic Investment Plan is an investment strategy wherein an investor needs to invest the same amount of money in a particular mutual fund at every stipulated time period.

Description: Investing in SIP enables an investor to take part in the stock markets without actively timing them and he/she can benefit by buying more units when the price falls and less units when the price rises.
This scheme helps reduce the average cost per unit of investment through a method called Rupee Cost
Averaging.

For Example: A person invests Rs 1000 for ten months in SIP. We will find out that the actual average purchase cost of asset would be lower than the average NAV of his investment over 10 months, which is the key benefit of Rupee Cost Averaging.

Actual average purchase cost as per SIP = (1000X10)/ (100+200+67+71+67+50+45+40+37+34) = 14.06

15. Systematic Transfer Plan

Definition: STP refers to the Systematic Transfer Plan whereby an investor is able to invest lump sum
amount in a scheme and regularly transfer a fixed or variable amount into another scheme.

Description: In case of a volatile market, STP helps the investors to periodically transfer funds from one
scheme (source scheme) to another (target scheme) and help them save the effort and time by
compressing multiple instructions required for redemption from one scheme to invest in the other into a single instruction.

Transfers are usually made from debt funds to equity funds if the market is doing well and vice versa if the market is not performing well. The STP can be classified based on the amount transferred from the source scheme to the target scheme. If a fixed sum is transferred from the source to the target scheme, then its called Fixed STP, and if the sum transferred is the profit part of the investment of source scheme, then its called Capital Appreciation STP.

16. Systematic Withdrawal Plan

Definition: SWP refers to Systematic Withdrawal Plan which allows an investor to withdraw a fixed or
variable amount from his mutual fund scheme on a preset date every month, quarterly, semi annually or
annually as per his needs.

Description: An investor can customize the cash flows as desired; he can either withdraw a fixed amount or just the capital gains on his investments. SWP provides the investor with a regular income and returns on the money that is still invested in the scheme.

For Example: You have 8,000 units in a MF scheme. You have given instructions to the fund house that you want to withdraw Rs. 5,000 every month through SWP.

On 1 January, the NAV of the scheme is Rs. 10.

Equivalent number of MF units = Rs. 5,000/Rs. 10 = 500

500 units would be redeemed and Rs. 5,000 would be given to you.

Your remaining units = 8,000 - 500 = 7500

Now, on 1 February, the NAV is Rs. 15. Thus,

Equivalent number of units = Rs. 5000/Rs. 15 = 333
333 units would be redeemed from your MF holdings, and Rs. 5,000 would be given to you.

Your remaining units = 7500 - 333 = 7167 And so this process continues till the time you want the
withdrawals.

17. Sortino Ratio

Definition: Sortino ratio is the statistical tool that measures the performance of the investment relative to the downward deviation. Unlike Sharpe, it doesnt take into account the total volatility in the investment.

Description: Sortino ratio is similar to Sharpe ratio, except while Sharpe ratio uses standard deviation in
the denominator, Frank A Sortino uses downside deviation in the denominator.Standard deviation involves both the upward as well as the downward volatility.
Since investors are only concerned about the downward volatility, Sortino ratio presents a more realistic picture of the downside risk ingrained in the fund or the stock.

18. Style Box

Definition: Style box, designed by Morningstar, is a 3x3 square grid which shows the investment style that the fund manager is following to manage the funds portfolio.

Description: For equity funds the horizontal axis of the style box shows the valuation of the fund which is subdivided into categories: value, blend (a value/growth mix) and growth. Growth funds are funds that are expected to grow at a pace that outweighs the average market growth rate.Value stocks are stocks that are available at a price lower than their intrinsic value, but have a potential to unlock the value in the long run. Blend style of investing combines the features of both value and growth funds. The vertical axis shows market capitalization which is further divided according to company-sizes (based on market-capitalization).

19. Swap

Definition: Swap refers to an exchange of one financial instrument for another between the parties
concerned. This exchange takes place at a predetermined time, as specified in the contract.

Description: Swaps are not exchange oriented and are traded over the counter, usually the dealing are
oriented through banks. Swaps can be used to hedge risk of various kinds which includes interest rate risk and currency risk. Currency swaps and interest rates swaps are the two most common kinds of swaps traded in the market.

20. Sector Specific Funds

Definition: Mutual funds which invest in a particular sector or industry are said to be sector-specific funds. Since the portfolio of such mutual funds consists mainly of investment in one particular type of sector, they offer less amount of diversification and are considered to be risky.

Description: Sector-specific funds are considered to be relatively more risky compared to a diversified
fund. As these funds take exposure in a single sector, the concentration risk is high. Their performance is aligned with the performance of the sector in which they are investing. As the exposure is not broad based, it carries a high degree of risk. This type of funds is normally suitable for a highly aggressive investor.

Some of the sector-specific funds are mentioned below:

 Banking funds: These are sector-specific mutual funds having a portfolio comprising mainly of
equities of different banks. So if in general the banking sector is performing well, one can expect
good returns.

 Pharma funds: These are sector-specific mutual funds which have a portfolio comprising mainly of
different pharmaceutical companies.

 Technology funds: Sector-specific mutual funds which have a portfolio comprising mainly of IT
companies.

 FMCG funds: Sector-specific mutual funds catering to the investments in the fast moving commodity goods stocks.

21. Expense Ratio

Definition: Expense ratio is the fee charged by the investment company to manage the funds of investors.

Description: All the investment companies incur cost for operating mutual funds and they charge a
percentage of asset funds to cover the expenses. Suppose the expense ratio is 1 per cent and your
investment is Rs 10,000, then Rs 100 is what you pay to the company as operating fee.

Major components of the cost are like legal cost, administration cost, advertising cost and the
management cost. This fee is different from the sales fee and commission or the expenses incurred on the buying and selling of portfolio.

22. Geometric Average Return

Definition: Popularly called Geometric Mean Return, it is primarily used for investments that are
compounded. It is used to calculate average rate per period on investments that are compounded over
multiple periods.

23. Gold Fund

Definition: Gold fund, as the name suggests, invests in various forms of gold. It can be in the form of
physical gold or stocks of gold mining companies. Gold funds which invest in physical gold offer investors the convenience of buying pure gold at low cost. There is no possibility of theft and you can sell these units at market linked prices anytime.

Description: There are various types of gold funds across the globe:
Gold Mining Funds: These funds invest in gold mining companies and returns from such funds are
dependent on the performance of these companies. Investment demand for gold is borne out of the
economic uncertainties as gold is considered to be a safe heaven when equity markets are tumbling.
Dichotomy between demand and supply also govern the gold prices.

Gold ETFs: Gold ETFs are exchange traded funds where the underlying asset is gold. Therefore, value of gold ETF depends upon the price of gold. One needs a demat account to invest in an ETF. The concept of gold ETFs in India was first introduced by Benchmark Asset Management Company, in India.

Gold Fund of Fund (FoF) : Gold FoF invests in the units of gold ETF and does not require a demat account.