Active Portfolio Management
It is a systematic and proactive approach to investment that involves the constant
review of the portfolio of the fund. The basic objective behind such investing style
is to beat the market. This investing style is based on the argument that markets
are not efficient and at any point of time there is always a scope to earn abnormal
profits through an active investment style.
Alpha measures the performance of fund managers .If alpha is positive it means that
fund manager is able to generate excess returns compared to expected return. If
alpha is negative fund manager is under performing.
This refers to the return that a fund can generate within a period of one year.
For the fund whose returns are not available for one year, the returns of the fund
can be annualized. Annualised returns are widely used to measure the performance
of a fund.
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. Kotak Mutual Funds,
SBI Mutual Funds, ICICI Prudential Mutual Funds etc. are the various AMC's in the
Asset Allocation involves the allocation of the total corpus or fund available with
the Mutual Funds to different class of assets like equities, bonds, derivatives
etc. The asset allocation is done in keeping the objective of the scheme into consideration.
Balanced fund is the fund that invests in equity, bond and money market instruments.
This fund is made for those investors who seek both capital appreciation and regular
Bottom-up investing is a strategy in which investor concentrates only on a specific
stock or a company irrelevant of in which industry/ sector the investment takes
place. They consider only those stocks whose fundamentals are very strong regardless
of macro economic variables.
This refers to the type of fund where investors have to commit their money for a
particular period of time. The units of the fund can be availed from the fund house
only during the NFO period, after which the units of the fund can be purchased from
the market. Closed-ended funds have to be necessarily listed on recognized stock
exchanges and an investor can exit from the fund at any point of time.
Contingent Deferred Sales Charge (CDSC)
Exit load imposed by certain funds on shares redeemed within a specific period of
purchase. Generally longer the holding period, smaller will be the exit load. Similarly,
shorter the holding period, higher will be the exit load.
This refers to the total deployable funds available with a mutual fund at any point
of time. This is also termed as AUM (Asset Under Management).
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
and has no role in portfolio management.
It is a type of long term debt instrument redeemable on a fixed date.
There is always a risk that the issuer of a fixed income security may not be able
to make timely payment of interest and repayment of principal. It is also referred
to as credit risk.
A fund invests its corpus in debt securities like Government securities, treasury
Bills, corporate Bonds etc. yielding steady returns. These funds carry low returns,
as the risk involved is low. These funds are generally preferred by investors with
low risk appetite and who need regular returns from their investment.
It is the process of converting the physical shares into Electronic form. SEBI had
made it mandatory to get the shares dematerialized. In this process the investor
opens an account with a Depository Participant (DP) and the holdings of the investor
is shown in this account.
An authorized entity that is involved in dematerialization of shares and maintaining
demat accounts of the investors.
An individual or a corporation serving as principal underwriter of a mutual fund's
units, buying shares directly from the fund, and reselling them to other investors
like retailer and institutional.
This refers to the risk management investment strategy of not putting all eggs in
one basket. With the help of diversification i.e. by putting fund across various
avenues, overall risk of the portfolio can be reduced to a great extent. This strategy
is widely used in risk management.
A portfolio that ensures maximum return for a given level of risk or a minimum level
of risk for an expected return. There are various theories available to construct
an efficient portfolio.
When an investor purchases units of the mutual fund scheme an initial amount charged
by a fund for its administrative expenses or for paying commissions to brokers.
This charge is termed as the entry load. Entry load is levied as a percentage of
NAV. (Also see exit load).
This refers to the funds that invest primarily in equity and equity related instruments
with an objective to provide capital appreciation.
When an investor wants to withdraw his or her money back from the fund, a kind of
redemption charge that the investor is required to pay. The idea behind the levy
of such charges is to discourage investors from making an exit from the fund. Exit
load is levied as a percentage of NAV. (Also see entry load).
It is the ratio of total expenses to net assets of the fund. Total expenses include
management fees, the cost of shareholder mailings and other administrative expenses.
A low expense ratio means that the fund is able to maintain the fund at low expenses.
As the size of the fund increases, the expense ratio decreases.
This refers to an investment plan in the shape of a pyramid structure where the
safest investments are at the base and the riskiest investments at the peak.
Fixed Income Security
A type of security that pays fixed interest at regular intervals of time ranging
from month to a year. These securities include gilt-edged securities, bonds (taxable
as well as tax-free), preference shares and debentures. Since there is low risk
as compared to the equity, there is no or little scope of capital appreciation.
A professional manager appointed by the Asset Management Company (AMC) to invest
money in accordance with the objective of the scheme.
These are the securities issued by the Government usually at a low interest rate.
These are considered as the safest investments, as the government security is free
from default risk.
This refers to the funds that invest mainly in government securities and treasury
bills. The objective here is the safety of principal and adequate liquidity.
The objective of such fund is to provide a regular income to the investors by investing
in fixed income securities like debentures, bonds, and high dividend shares. The
fund pays dividends to the investors out of its earnings.
This refers to the fund that at any point of time has same composition of asset
as that of its benchmark. These funds rigorously follow their benchmark. These come
under the passive investment style. Such an investment style believes that the market
is efficient and all the information are fully reflected in the stock prices.
Interest Rate Risk
The prices of a debt security are subject to the interest rate fluctuations in the
market. An increase in the interest rates results in decrease in value of the bond.
Therefore debt oriented mutual fund schemes; this interest rate risk affects the
NAV of the fund.
A fund that invests its corpus in short term instruments like call markets, treasury
bills, Commercial Paper (CP), Certificate of Deposit (CD). Generally returns are
very low in these funds. These funds are meant for the big corporate to park their
fund for a very short period of time like one week.
The liquidity risk is involved in both type of securities i.e. fixed income security
as well as equity and refers to the situation when these securities may not be sold
in the market at close to their value.
A charge is levied by the fund when an investor purchase (entry load) or sells (exit
load) units in the fund.
Net Asset Value (NAV)
Basically NAV is refers to the price of the unit of the mutual fund and is calculated
This is the performance indicator for a mutual fund scheme. On can buy the units
of the mutual funds at the prevailing NAV plus the entry load as applicable.
There is a category of mutual fund schemes in which units can be purchased directly
from the fund without any sales charge or brokerage. US-64 is an example of a no-load
Passive portfolio management
This investment style is exactly opposite of the active portfolio management. In
this style the portfolio manager assumes that markets are efficient and all information
is already analysed and reflected in the prices of share and there is no scope of
finding any undervalued stock.
Every security in the financial market is subject to risk or infact a plethora of
risks. It is very difficult for an investor to evaluate risk. There are certain
agencies engaged in providing credit rating to the securities issued by the various
issuers. The rating is done specific to the security. Crisil, Icra, Care are some
of the credit rating agencies.
It is the date announced by the mutual fund, which is a cut-off date for receiving
corporate benefits like dividends, rights, bonus etc. Only investors whose names
appear in the AMC registers on that date are eligible for the said benefits.
It is a plan where the earnings of a mutual
fund scheme are not returned to the investors but get reinvested back in the fund.
Upon increase in NAV the investor gets the capital appreciation.
This type of the risk is inherent in fixed income securities and arises due to interest
rate change as a result of which the interest received on these instruments can't
be reinvested in higher interest bearing instruments.
Rupee Cost Averaging
This refers to the regular investment of an equal amount of money at equal intervals
of time. This is an important tool with the help of which an investor can decrease
its cost of purchase to a great extent.
The corpus of the fund can be invested in the stocks of a particular sector. For
example any pharma fund will invest its fund only in the companies of the pharma
Sponsor of the Asset Management Company (AMC) is the parent organization that contributes
the initial capital of the AMC. For example State Bank of
is the sponsor for SBI Mutual Fund.
Systematic Investment Plans
Systematic Investment Plans provide the benefits of low cost of purchase by, instead
of putting a lump sum amount, investing a pre-specified amount in a scheme at pre-specified
intervals at then prevailing NAV. Entry load is applicable as per the scheme.
Systematic Withdrawal Plans
Nowadays, mutual fund offer systematic withdrawal facility whereby investor can
withdraw pre specified money from their investments. This ensures the regular inflow
to the investors.
This refers to the transferring from one scheme to another in a group of schemes
of the same Mutual Fund, if rules so permit. A switching may or may not involve
This is that part of the total risk that is posed by the factors that are beyond
the control of the company. This also termed as the market risk and is essentially
non-diversified in nature. This risk is caused by macro level factors like inflation,
interest rates, budget announcements political unrest, weather conditions, general
state of economy etc.
Tax saving fund
Investment in these funds allow the investors to claim a rebate under the Income
tax Act. Generally these funds carry a lock-in period with them in order to claim
Professional firms which maintain the records of unit holders of the AMC.
These are bills of exchange having short term maturity issued by the Reserve Bank
. These securities are guaranteed by the Govt. of
and hence carry low or no risk and therefore returns are also low. These are also
termed as T-Bill.
Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals).
The main responsibility of the Trustee is to safeguard the interest of the unit
holders and inter alia ensure that the AMC functions in the interest of investors
and in accordance with the Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the
respective Schemes. Atleast 2/3rd directors of the Trustee are independent directors
who are not associated with the Sponsor in any manner.
This is the part of the total risk that is peculiar to a particular company. This
risk could arise due to company specific factors like operational factors, financial
distress, labour turnover etc. This type of risk can be reduced to a great extent
with the help of diversification.
This refers to the investment style that attempts to pick those stocks that are
traded below the intrinsic value and hence considered as the undervalued.
It is a fund that takes over the Non Performing Assets (NPAs) of banks or financial
institutions at a discount and issues pass-through certificates to the investors.
This usually carries a low rate of returns.
Zero Coupon Bond
This is a kind of debt instrument that does not carry any interest or coupon attach
to it. Rather it is sold at a heavy discount to the face value and provides a capital
appreciation to the investor at the time of redemption. The difference between the
discounted price and the maturity value represents the gain to the investor.