Glossary of Mutual Fund Terms

Investing can seem like navigating a maze with all its complex terms and concepts. Whether you're a beginner looking to make your first investment or someone trying to understand the finer details of your portfolio, it's crucial to grasp the basic language of the financial world.

From different types of funds and investment strategies to the various fees and risks involved, understanding these terms can help you make informed decisions and build a strategy that suits your financial goals. Below, we've compiled an extensive glossary of investment terms, breaking the jargon into simple explanations. This guide aims to demystify the complex investing world, making it more accessible to everyone. Let’s have a look: 

Mutual Fund Terms You Should Know

1. Absolute Return: Measures how much money a fund has made or lost over a specific time, regardless of the market's overall movement. However, it doesn't consider how long it took to make that return.
2. Active Management: A strategy where the fund's managers make specific investments to outperform an investment benchmark index. Managers may use research, market forecasts, and their own judgment and experience to buy, hold, and sell securities.
3. Advisor: A professional who advises you on investing your money. They help you decide on buying, selling, and managing your investments.
4. Advisory Fee: The money you pay to a mutual fund manager for their services, which includes managing the fund's investments and taking care of administrative tasks.
5. Aggressive Hybrid Fund: These funds invest 65% to 80% of their assets in equity and equity-related instruments, with the remaining 20% to 35% invested in debt instruments. They aim for higher returns by taking on more risk through a larger equity allocation.
6. Alerts: Notifications you receive about your mutual fund investments, like when a specific selling price you set is reached.
7. Alpha: A way to understand if a fund did better than expected, given its risk. A high alpha means the fund performed well compared to its expected risk level.
8. Annual Report: A yearly document from a mutual fund that tells you how it's doing, including its financial condition and investment performance.
9. Annualised Return: A way to show the return on an investment over a year, considering compounding. It gives a clearer picture of performance compared to a simple average.
10. Arbitrage Fund: Mutual funds that seek to profit from price inefficiencies in the market without taking on too much risk. They typically invest at least 65% in equity and equity-related instruments using arbitrage strategies.
11. Asset Allocation: The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process aims to optimise the balance between risk and reward based on an individual's goals, risk tolerance, and investment horizon.
12. Asset Class: Different types of investments, like stocks, bonds, or real estate. Each has its own level of risk and potential for returns.
13. Asset Management Company (AMC): The company that makes investment decisions for a mutual fund, managing its portfolio.
14. Assets Under Management (AUM): The total value of all the investments managed by a mutual fund.
15. Association of Mutual Funds in India (AMFI): An organisation representing the mutual fund industry in India, offering information and training and working on industry policies.
16. Average Maturity Period: For debt funds, it's the average time until the bonds in the portfolio are due to be paid back. Longer maturities usually mean more sensitivity to interest rate changes.
17. Balanced Hybrid Fund: Invests 40% to 60% in equity and equity-related instruments and 40% to 60% in debt instruments. It aims to balance risk and return, offering a mix of income and growth.
18. Banking and PSU Fund: These funds invest at least 80% of their assets in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds.
19. Basis Point: 1/100th of a percent. Used in finance to describe small changes in interest rates or the cost of an investment fund.
20. Benchmark: A standard, like a stock index, used to compare a mutual fund's performance to see how well it's doing.
21. Beta: A measure of how much a fund's value is likely to move compared to its benchmark. A beta higher than one means more volatility.
22. Capital Appreciation: When the value of an investment goes up, not including the returns from dividends or interest.
23. Capital Gain: The profit you make when you sell an investment for more than you paid for it.
24. Capital Gains Tax: Taxes you pay on the profit from selling investments like stocks or bonds.
25. Capital Loss: A loss that occurs when you sell an investment for less than you paid for it.
26. Cheque Book Facility: A feature of some mutual funds, especially liquid funds, allowing you to write cheques against your investment for quick access to your money.
27. Children’s Fund: A special type of mutual fund designed with a lock-in period of at least 5 years or until the child reaches the age of majority, focusing on saving for children's future expenses like education.
28. Close-Ended Scheme: A mutual fund with a set end date. You can buy shares only when it launches, and you typically can't sell them back to the fund until it ends.
29. Closing NAV (Net Asset Value): A mutual fund's share at the end of the trading day is calculated by dividing the total value of all the fund's holdings by the number of shares.
30. Commission: A fee paid to a broker or agent for buying or selling investments on your behalf.
31. Common Stock: Shares of a company giving you ownership and voting rights. Investors can earn dividends and gain from the increase in the stock's value.
32. Compound Interest: The interest on a loan or deposit calculated based on the initial principal and the accumulated interest from previous periods. Compound interest allows your investments to grow faster than simple interest, as you earn interest on the money you invest as well as on the interest that money earns.
33. Conservative Hybrid Fund: These funds allocate 10% to 25% of their portfolio to equity and equity-related instruments and 75% to 90% to debt instruments. They are designed for investors seeking lower risk and steady income.
34. Contingent Deferred Sales Charge (CDSC): A fee you might pay if you sell your mutual fund shares soon after buying them, decreasing over time.
35. Contra Fund: These funds follow a contrarian investment strategy, investing at least 65% in stocks. They buy undervalued or out-of-favour stocks in the belief that these stocks will perform well in the future.
36. Corporate Bond Fund: Focuses on investing a minimum of 80% of its assets in AA+ and higher-rated corporate bonds, aiming for a steady income with relatively low risk.
37. Corporate Bond: A loan to a company that pays investors interest. It's considered safer than stocks but riskier than government bonds.
38. Corpus: The total amount of money invested in a mutual fund.
39. Cost Averaging: Investing a fixed amount regularly, regardless of the investment's price, to reduce the impact of price volatility.
40. Coupon: The interest rate on a bond, showing how much you'll earn from the investment.
41. Credit Risk Fund: Invests at least 65% of its assets in corporate bonds rated AA and below, taking on higher risk in the pursuit of higher returns compared to safer bond funds.
42. Credit Risk: The chance that the entity you lent money to by buying a bond won't be able to pay you back.
43. Debt Funds: Mutual funds that invest in bonds or other debt instruments, aiming to provide steady income and lower risk than stock funds.
44. Direct Plan: A lower-cost mutual fund scheme available directly from the fund house, eliminating intermediary commissions, ideal for self-directed investors aiming for higher returns.
45. Discount to NAV: When a mutual fund's market price is less than its NAV, meaning you can buy it for less than its underlying value.
46. Diversification: Spreading investments across various assets to reduce risk. It means not putting all your eggs in one basket.
47. Dividend Plan: A mutual fund option that pays out income from the fund's investments to shareholders.
48. Dividend Reinvestment Plan: Instead of getting dividend payments, your dividends are used to buy more shares of the mutual fund.
49. Dividend Yield: A percentage showing how much a company pays out in dividends each year relative to its stock price.
50. Dividends: Payments made to shareholders from a company's profits.
51. Dynamic Asset Allocation or Balanced Advantage Fund: These funds dynamically manage their asset allocation between equity/debt, ranging from 0% to 100% in each, adjusting based on market conditions to balance risk and return.
52. Dynamic Bond Fund: Invests across different durations, adjusting the portfolio in response to changes in interest rates and market conditions to optimise returns.
53. Electronic Clearing Mechanism: A system that lets you transfer money electronically, used by mutual funds to pay out redemptions and dividends.
54. ELSS (Equity-Linked Saving Scheme): Invests at least 80% in stocks, qualifying for tax deductions under section 80C of the Income Tax Act. It has a lock-in period of 3 years.
55. Entry Load: A fee charged when you buy mutual fund shares. It's now mostly abolished.
56. Equity Funds: Mutual funds that invest primarily in stocks, aiming for higher returns with higher risk.
57. Equity Savings Fund: Invests in a mix of equity (minimum 65%), debt instruments (minimum 10%), and derivatives, using hedging strategies to reduce risk.
58. Exchange Traded Fund (ETF): A type of fund that tracks an index, commodity, or basket of assets like a mutual fund but trades like a stock on an exchange.
59. Exit Load: A fee for selling your mutual fund shares within a certain time frame, meant to discourage short-term trading.
60. Expense Ratio: The annual fee that all funds charge their shareholders, expressed as a percentage of the fund's total assets.
61. Fixed Maturity Plans (FMPs): Debt funds with a fixed investment period, aiming to protect against interest rate fluctuations.
62. Flexi Cap Fund: Invests at least 65% of its assets in equity and equity-related instruments across large, mid, and small-cap stocks without any capitalisation bias.
63. Focused Fund: Concentrates on a limited number (up to 30) of stocks, investing at least 65% in equity and equity-related instruments. It aims for high-conviction bets rather than diversification.
64. Folio Number: Your unique identifier for your mutual fund account, similar to a bank account number.
65. Fund Fact Sheet: A monthly or quarterly update from a mutual fund detailing performance and holdings.
66. Fund House: Another term for a mutual fund company or Asset Management Company (AMC).
67. Fund Manager: The person or team responsible for making investment decisions in a mutual fund.
68. Fund of Funds (Overseas/Domestic): Invests a minimum of 95% of its assets in other mutual funds, which can be either domestic or international, providing diversified exposure through a single investment.
69. Gilt Fund with 10-year constant Duration: Similar to a regular gilt fund but maintains a portfolio duration equal to 10 years, targeting specific interest rate movements.
70. Gilt Fund: Invests a minimum of 80% in government securities across maturities, offering a safer investment option due to the backing of the government.
71. Government Securities: Bonds issued by the government are seen as safe investments because the government's credit backs them.
72. Growth Plans: Investment options in mutual funds where all returns are reinvested to allow the investment to grow over time.
73. Hedge Fund: A private investment fund that uses complex strategies, including leverage and derivatives, aiming for high returns.
74. Hedge: An investment made to reduce the risk of adverse price movements in another investment.
75. IDCW (Income Distribution cum Capital Withdrawal): A mutual fund choice offering periodic income distributions from the fund's earnings, appealing to investors desiring regular income.
76. IDCW Reinvest: An option where income distributions from a mutual fund are automatically reinvested to buy more units, leveraging the power of compounding.
77. Income Fund: A type of debt fund that focuses on generating income from bonds with longer maturities.
78. Index Funds: These funds invest a minimum of 95% of their assets in securities of a specific index, mirroring the index's performance with minimal tracking error.
79. Index: A benchmark that tracks the performance of a specific set of stocks or bonds.
80. Initial Net Asset Value: The NAV of a mutual fund when it first starts.
81. Interest Rate Risk: The risk that changing interest rates will affect the value of your investments.
82. Investment Horizon: The total time an investor expects to hold a portfolio or an investment before taking their money out. Your investment horizon can affect the types of investments you choose. For example, someone with a long-term investment horizon may be more comfortable with higher-risk, potentially higher-return investments.
83. Investment Objective: The goal a mutual fund aims to achieve, like growth, income, or stability.
84. Investment Philosophy: The underlying beliefs and strategies guiding a mutual fund's investment decisions.
85. Large & Mid Cap Fund: Allocates at least 35% of its assets in large-cap stocks and another 35% in mid-cap stocks, aiming to balance the stability of large caps with the growth potential of mid caps.
86. Large Cap Fund: Invests at least 80% of its assets in large-cap stocks, which are typically well-established companies with stable earnings.
87. Leverage: Using borrowed money to increase the potential return on an investment.
88. Liquid Fund: Invests in debt and money market securities with maturities of up to 91 days, offering high liquidity and low risk.
89. Liquidity Risk: The risk that an investment cannot be sold quickly enough to prevent a loss or meet a financial obligation.
90. Load-Adjusted Return: The investment return on a mutual fund adjusted for charges such as sales loads.
91. Lock-in Period: A period during which you cannot withdraw your investment from a mutual fund without incurring a penalty.
92. Low Duration Fund: Targets investments in debt and money market instruments with a Macaulay duration of the portfolio between 6 months and 12 months.
93. Management Fee: A fee paid to the fund's managers for their work in managing the fund's portfolio.
94. Market Capitalisation: The total market value of a company's outstanding shares, calculated as share price times the number of shares.
95. Market Risk: The risk that the value of an investment will decrease due to market changes. It affects all investments in the market.
96. Medium Duration Fund: Focuses on debt and money market instruments with a Macaulay duration of the portfolio between 3 years and 4 years.
97. Medium to Long Duration Fund: Invests in debt and money market instruments with a Macaulay duration of the portfolio between 4 years and 7 years.
98. Mid-Cap Fund: Allocates at least 65% of its assets in mid-cap stocks, aiming for higher growth potential compared to large-cap stocks.
99. Money Market Fund: Invests in money market instruments with maturities of up to 1 year, providing liquidity and safety.
100. Money Market: A section of the financial market where short-term funds are borrowed and lent. Money market mutual funds invest in these short-term securities, offering liquidity and safety.
101. Monthly Income Plans (MIPs): Mutual funds are designed to provide a steady income, usually by investing in a mix of debt and a small portion of stocks.
102. Multi Asset Allocation Fund: Invests in at least three different asset classes, with a minimum allocation of at least 10% in each, diversifying risk and potential for returns.
103. Multi Cap Fund: Invests at least 75% of its assets in equity and equity-related instruments across large, mid, and small-cap stocks, aiming for flexibility in capitalisation focus.
104. Mutual Fund: A financial vehicle that pools money from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
105. Net Asset Value (NAV): The per-share value of a mutual fund's assets minus its liabilities. It's the price at which you buy or sell fund shares.
106. Offer Document: A detailed document that provides essential information about a mutual fund, including its objectives, risks, charges, and expenses.
107. Open-Ended Fund: A mutual fund that has no limit on the number of shares it can issue, allowing investors to buy or sell shares directly from the fund.
108. Overnight Fund: Invests in overnight securities with a maturity of 1 day, offering the highest level of liquidity and the lowest risk.
109. P/E Ratio (Price-to-Earnings Ratio): A measure that compares the price of a company's stock to its earnings per share, indicating how much investors are willing to pay per dollar of earnings.
110. Passive Management: An investment strategy that mirrors a market index and does not attempt to outperform it. This approach minimises buying and selling and thus keeps transaction costs and taxes lower. Index funds and most ETFs are examples of passively managed funds.
111. Personal Identification Number (PIN): A unique number given to mutual fund investors to enable transactions and access account information online.
112. Portfolio Diversification: Spread your investments across various assets (such as stocks, bonds, real estate, and cash) to reduce risk. Diversification aims to maximise returns by investing in different areas that would each react differently to the same event.
113. Portfolio Turnover Ratio: A measure of how frequently assets within a fund are bought and sold by the managers. High turnover can indicate higher trading costs and taxes.
114. Portfolio: The collection of investments held by an individual or institution, including stocks, bonds, and mutual fund shares.
115. Preferred Stock: A type of stock that provides dividends before common stock and has priority over common stock in the event of a company's liquidation.
116. Premium: In mutual funds, it's the amount by which the selling price of a fund's shares exceeds its NAV. Also, the term is used for bonds sold above their face value.
117. Rebalancing: The process of realigning the weightings of a portfolio's assets by periodically buying or selling assets to maintain an original or desired level of asset allocation or risk.
118. Record Date: The date set by a mutual fund to determine which shareholders are eligible to receive a dividend or distribution.
119. Redemption: The process of selling mutual fund shares back to the fund for cash.
120. Regular Plan: A mutual fund scheme purchased through intermediaries, including a higher expense ratio to cover commission fees, suitable for those seeking advisory services.
121. Repurchase Price: The price at which a mutual fund buys back its shares from investors, typically close to the current NAV
122. Retirement Fund: Designed specifically for retirement savings, with a lock-in period of at least 5 years or until retirement age, whichever is earlier.
123. Returns: The profit or loss on an investment over a specific period, usually expressed as a percentage.
124. Risk-Return Tradeoff: The principle that potential return on investment is usually directly correlated with the level of risk. Generally, higher risk is associated with higher potential returns and vice versa. Understanding your own risk tolerance is crucial in creating an investment strategy that aligns with your goals and comfort level.
125. Risk: The potential for losing money on an investment due to various factors like market volatility, interest rate changes, or issuer default.
126. Rupee-Cost Averaging: An investment strategy where you divide up the total amount to be invested across periodic purchases of a target asset to reduce the impact of volatility on the overall purchase. The purchases occur at regular intervals regardless of the asset's price.
127. SEBI (Securities and Exchange Board of India): The regulator for securities and commodity markets in India under the jurisdiction of the Ministry of Finance, Government of India.
128. Sectoral/Thematic Fund: Focuses at least 80% of its assets in stocks of a specific sector or theme, targeting growth through concentrated sector exposure.
129. Sharpe Ratio: A measure that indicates the average return earned in excess of the risk-free rate per unit of volatility or total risk.
130. Short Duration Fund: Invests in debt and money market instruments with a Macaulay duration of the portfolio between 1 year and 3 years.
131. Small Cap Fund: Allocates at least 65% of its assets in small-cap stocks, targeting higher growth potential at a higher risk.
132. Standard Deviation: A statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance is wide, indicating greater volatility.
133. Systematic Investment Plan (SIP): A plan that allows investors to invest a fixed amount in a mutual fund scheme at regular intervals.
134. Systematic Transfer Plan (STP): A service that allows investors to transfer a specific amount of money from one mutual fund to another within the same fund family at regular intervals.
135. Systematic Withdrawal Plan (SWP): A plan that allows investors to withdraw a specific amount from their mutual fund investment at regular intervals.
136. Taxable Income: The portion of your income that is subject to income tax.
137. Tracking Error: The difference between the performance of a fund and its benchmark. A low tracking error indicates a fund closely follows its benchmark.
138. Treasury Bills (T-Bills): Short-term government securities with maturities of one year or less. They are considered safe investments.
139. Triggers: Options in a mutual fund that automatically initiate a buy or sell action when certain predefined conditions are met.
140. Trustee: An individual or organisation that holds or manages and invests assets for the benefit of another.
141. Ultra Short Duration Fund: Targets debt and money market instruments with a Macaulay duration of the portfolio between 3 months and 6 months, offering slightly higher returns than liquid funds with low risk.
142. Unit Holder: An investor who owns shares (units) in a mutual fund.
143. Unit: Represents a portion of ownership in a mutual fund or an investment trust.
144. Value Fund: Focuses on stocks that are undervalued compared to their intrinsic value, investing at least 65% in such stocks with a value investment strategy.
145. Volatility: The degree of variation of a trading price series over time, measured by the standard deviation of returns. High volatility means the price of the asset can change dramatically in either direction over a short time period.
146. Yield Curve: A graph that shows the relationship between interest rates and bonds of different maturities, typically used to predict economic changes.
147. Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures, including all interest payments and the gain or loss if purchased at a price different from its face value.
148. Yield: The income return on an investment, such as the interest or dividends received, expressed as a percentage of the investment's cost or current value.

Investing is a vital part of financial planning, offering the potential for growth and security for your future. However, the vast array of terms and concepts can be overwhelming. By familiarising yourself with the basic terminology outlined in this guide, you can navigate the investment landscape more confidently. Remember, understanding these terms is just the first step. Armed with this knowledge, you're better equipped to discuss your options with financial advisors, make informed choices, and work towards achieving your financial objectives.