Tuesday, January 8, 2019

A Glossary of Mutual Funds

Assets Management Company

It is a highly regulated organization registered under the regulations of the country that pools money from many people into portfolio structured to achieve certain objectives. Usually an AMC manages several funds –open ended/ close ended across several categories- growth, income, balanced. 

Balanced Fund

It is a hybrid portfolio of stocks and bonds. This fund is structured according to the proposed objectives in the new fund offer statement. The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. They generally invest 40-60% in equity and debt instruments. 

Close Ended Fund

these are not mutual funds that can neither issue fresh units to investors nor the investor can redeem after the offer period is over before the cutoff or redemption date. Some of the closed ended funds can be traded over the stock exchanges if these funds are listed on the stock exchanges. In case the funds are not listed on the exchanges, the investors have to wait till redemption date to exit. Most listed close ended funds trade at discount to the NAV.

Open Ended Fund

These are the mutual funds that can be traded in the market anytime. The mutual funds can issue fresh units of funds and the investors can redeem their units anytime. There is no restriction like closed ended funds.

Entry/ Exit Load

These are the charges that have to be paid to the funds by the investor when an investor buys/sells a fund. There could be a load at the time of entry or exit, but rarely at both times.

Expense Ratio

This is the ratio of all the annual expenses of the funds to the total assets under management. The annual expenses include the management fee, administrative cost.

Growth Fund

This is a fund that mainly constitutes stocks with good or improving profit prospects. The primary emphasis is on capital appreciation. This capital appreciation is measured by the increase in the NAV.


Liquidity refers to the ease with which any investment can be converted into cash or can be traded. A person should be able to buy or sell a liquid asset quickly with virtually no adverse price impact.

Net Assets Value (NAV)

This is the market price or value of one unit of a fund that an investor is willing to pay or will get if the investor buy/sell the units of the fund. This is calculated by adding the total value of all the assets or the securities held by the fund and cash and any accrued income minus all the liabilities. The total value is divided by the number of units outstanding.

Interest Rate Risk

This risk arises from the fluctuations in the interest rate in the market over a period of time and is borne by fixed-interest securities, and by borrowers with floating rate loans. When interest rates rise, the market value of fixed-interest securities declines and vice versa.

Credit Risk

Credit risk involves the loss arising due to a customer’s or counterparty’s inability or unwillingness to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions.

Capital Market Risk

Capital Market Risk is the risk arising due to changes in the capital market conditions.

Sectoral Equity Mutual Fund Scheme

This is a mutual fund scheme that focuses on investments in the equity of companies from some particular sectors or industries. These sectors are often a limited number of sectors — usually one to three.

Index Funds

These are the funds that invest in the stocks of those companies that are part of the benchmark index such as the BSE Sensex or the Nifty in the same weight age as the respective indices.

Equity Linked Tax Saving Schemes (ELSS)

These are the mutual fund schemes that invest predominantly in equities, and offer tax rebates to investors under section 80 C of the Income Tax Act. Currently rebate u/s 80C can be availed up to a maximum investment of Rs 1, 00,000. There is a mandatory lock-in period of 3 years to enjoy tax breaks.

Monthly Income Plan Scheme

A mutual fund scheme which aims at providing regular income (not necessarily monthly, don’t get misled by the name) to the unit holder, usually by way of dividend, with investments predominantly in debt securities (up to 95%) of corporate and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%) to ensure higher return.

Income Schemes

Debt oriented schemes investing in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.

Floating-Rate Debt Fund

A fund comprising of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.

Gilt Funds

These funds invest exclusively in government securities.

Fund of Funds

A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes. Just as fund invests in stocks or bonds on your behalf, a FoF invests in other mutual fund schemes.

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