Basics of mutual funds

The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to
explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it
can serve as an investment tool.

Getting Started
Before we move to explain what is mutual fund, it’s very important to know the area in which mutual funds works,
the basic understanding of stocks and bonds.

Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance,
ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

Bonds

Bonds are basically the money which you lend to the government or a company, and in return you can receive
interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to
be the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real estate, and
precious metals), but the majority of mutual funds invest in stocks and/or bonds.

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Working of Mutual Fund

Regulatory Authorities

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified
regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public
or by private sector entities including one promoted by foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types
of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be
independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual
funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual
fund industry.

AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse
areas such as valuation, disclosure, transparency etc.
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What is a Mutual Fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool
their money together with a predetermined investment objective. The mutual fund will have a fund manager who
is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a
mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or
unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to others they are very cost
efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase
stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage
to mutual funds is diversification, by minimizing risk & maximizing returns.

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Diversification

Diversification is nothing but spreading out your money across available or different types of investments. By
choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.

The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set
up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then
adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you
purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in
a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade
corporate bonds, etc).

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Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and
return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors
can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose
from. It is easier to think of mutual funds in categories, mentioned below.

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

1. Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do not have a fixed
maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key
feature of open-end schemes is liquidity.

2. Close - Ended Schemes:

These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the
initial issue. Depending on the structure of the scheme there are two exit options available to an investor after
the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges
where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the
scheme on account of demand and supply situation, expectations of unitholder and other market factors.
Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual
Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units
during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the
investor.

3. Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The
units may be traded on the stock exchange or may be open for sale or redemption during pre-determined
intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect
higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns.
For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves
ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher
as compared to the bank deposits but the risk involved also increases in the same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional
management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free.
This is because the money that is pooled in are not invested only in debts funds which are less riskier but are
also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund
involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

Overview of existing schemes existed in mutual fund category: BY NATURE

1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary
different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-
classified depending upon their investment objective, as follows:

• Diversified Equity Funds

• Mid-Cap Funds
 • Sector Specific Funds

• Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

2. Debt funds:

The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and
financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds
ensure low risk and provide stable income to the investors. Debt funds are further classified as:

• Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of
India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These
schemes are safer as they invest in papers backed by Government.

• Income Funds: Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.

• MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in
equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-
return matrix when compared with other debt schemes.

• Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily
invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some
portion of the corpus is also invested in corporate debentures.

• Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank
call money market, CPs and CDs. These funds are meant for short-term cash management of
corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank
low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

3. Balanced funds:

As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed
income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to
provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability
in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund.
The investor can align his own investment needs with the funds objective and invest accordingly.

By investment objective:

• Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is
to provide capital appreciation over medium to long term. These schemes normally invest a major part
 of their fund in equities and are willing to bear short-term decline in value for possible future
appreciation.

• Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to
provide regular and steady income to investors. These schemes generally invest in fixed income
securities such as bonds and corporate debentures. Capital appreciation in such schemes may be
limited.

• Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically
distributing a part of the income and capital gains they earn. These schemes invest in both shares and
fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

• Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital
and moderate income. These schemes generally invest in safer, short-term instruments, such as
treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Other schemes

• Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time.
Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS)
are eligible for rebate.

• Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the
NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The
percentage of each stock to the total holding will be identical to the stocks index weightage. And hence,
the returns from such schemes would be more or less equivalent to those of the Index.

• Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries as
specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods
(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the
respective sectors/industries. While these funds may give higher returns, they are more risky compared
to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time.

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Types of returns

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it
 receives over the year to fund owners in the form of a distribution.

• If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also
pass on these gains to investors in a distribution.

• If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in
price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice
either to receive a check for distributions or to reinvest the earnings and get more shares.

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Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.

Advantages of Investing Mutual Funds:

1. Professional Management - The basic advantage of funds is that, they are professional managed, by well
qualified professional. Investors purchase funds because they do not have the time or the expertise to manage
their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their
investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors
risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large
number of assets so that a loss in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and
when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in
the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as
little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not
dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or
not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an
investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of
jargon.

3. Dilution - Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the result of a successful
fund getting too big. When money pours into funds that have had strong success, the manager often has trouble
finding a good investment for all the new money.

4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation.
For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable
the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains
liability.

Investments in Mutual Fund

Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that
investing in mutual funds provide like diversification, professional management, the ease of investment process
has proved to be a major enabling factor. However, with the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors
needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar
investment objectives as the investor.

With the plethora of schemes available in the Indian markets, an investors needs to evaluate and consider
various factors before making an investment decision. Since not everyone has the time or inclination to invest
and do the analysis himself, the job is best left to a professional. Since Indian economy is no more a closed
market, and has started integrating with the world markets, external factors which are complex in nature affect us
too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major
happening in Asian market have a deep impact on the Indian stock market. Although it is not possible for an
individual investor to understand Indian companies and investing in such an environment, the process can
become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and
whose Asset Management Company invests in research) provide an option of investing without getting lost in the
complexities.
Most importantly, mutual funds provide risk diversification: diversification of a portfolio is amongst the primary
tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder.
Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and
hence would be better off leaving that to a professional. Mutual funds represent one such option.
Lastly, Evaluate past performance, look for stability and although past performance is no guarantee of future
performance, it is a useful way to assess how well or badly a fund has performed in comparison to its stated
objectives and peer group. A good way to do this would be to identify the five best performing funds (within your
selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three
years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus
demonstrated their ability to be not only good but also, consistent performers.

An investor can choose the fund on various criteria according to his investment objective, to
name a few:

• Thorough analysis of fund performance of schemes over the last few years managed by the fund house
and its consistent return in the volatile market.

• The fund house should be professional, with efficient management and administration.

• The corpus the fund is holding in its scheme over the period of time.

• Proper adequacies of disclosures have to seen and also make a note of any hidden charges carried by
them.

• The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall
return

NRI MONEY IN MUTUAL FUNDS RISING

It's not just that Indians are only relying on India growth story; even others do, like our foreign partners so called
NRI, FII, etc. As per latest data form central bank, foreigners, major chunk of investments has seen good amount
of rising trend in the Indian mutual funds industry, since 2003. They hold around Rs 1,028 crore worth of units of
Indian mutual funds in 2003. The figure has increased sharply to Rs 2,663 crore in 2004 and Rs 4,966 crore in
2005, as per central bank data. It is not clear which country contributed the most to the MF industry as most
funds doesn’t disclosed country wise list, As a result, unspecified countries account for over 70%.

NRIs - reason to invest

The ever growing economy, with robust growth & well diversified industry, India seems to be a desired
destination for NRI’s. It’s assumed that Indian external sector performance will continue to be good, thus one
needs to look at the outsourcing revolutions that is taking place across the globe, in not only the services but
also the manufacturing and research sectors. On the investment side, moderate rules and better and well
regulated markets, with looking at investors sentiments which are drawing in capital to fund India's growth.

1. Dynamic policy by government

It has been close to 2 decades since the reforms process has started, with the main push coming with the
twin devaluations in 1991. During this period numerous developments have taken places that have
contributed to the flexibility of the Indian economy. Key amongst these are the opening up of the Indian
economy to foreign investment, strengthening of the domestic financial system, liberalization of imports,
rationalization of interest and exchange rates, a more conducive environment for investing in industry, and
of course, the people-intensive services sector.

This resilience is clearly reflected in the fact that average economic growth rates have moved up and India
has emerged as one of the fastest growing economies in the world.

2. Priority focusing agriculture, infrastructure

In recent times there has been a renewed vision on two key but long ignored segments of the Indian
economy – agriculture and infrastructure. The focus on agriculture and related activities, which supports
approximately 65% of the Indian population, should provide a new thrust area for economic growth.

3. The global outsourcing boom

Indian had become a major hub for business process outsourcing companies, but there is much more to this
outsourcing boom than is commonly understood. Fortunately, India stands to benefit from it in a great
measure.

4. Well equipped & regulated capital markets

The Indian stock and debt markets, including banks and mutual funds are well regulated by the Securities
and Exchange Board of India and the RBI, various measures are taken to protect investors’ sentiments &
interest. In terms of infrastructure the Indian institutional framework is improving rapidly, backed by a strong
financial system.
NRI GUIDE BOOK FOR MUTUAL FUNDS

1. Who is a Non Resident Indian?

A Non Resident Indian (NRI) is an Indian citizen or a person of Indian origin who stays abroad for
employment/carrying on business or vocation outside India or stays abroad under circumstances indicating
an uncertain duration of stay abroad. A person shall be deemed to be of Indian origin if he/she or either of
his/her parents or grandparents were born in undivided India.

2. What is an Overseas Corporate Body (OCB)?

An Overseas Corporate Body (OCB) includes overseas companies, partnership firms, societies and other
corporate bodies owned predominantly by non-resident persons of Indian nationality or origin outside India.

3. Who is a Foriegn Institutional Investor (FII)?

A Foreign Institutional Investor (FII) is a corporate registered by Securities and Exchange Board of India.

4. Can NRI invest in mutual fund schemes?

Yes, NRIs can invest in any mutual fund schemes.

5. How will an NRI invest in Indian MFs?

To invest in Indian Mutual Funds, the NRI has to open any one of the following three kinds of accounts. He
can open any of these accounts through the banks who provide the facility. The three types of accounts are
as follows:

Non-Resident (External) Rupee (NRE) accounts are Rupee accounts on a repatriable basis. They can be
opened with either funds remitted from abroad or local funds, which can be remitted abroad.

Ordinary Non-resident Rupee (NRO) accounts are Rupee accounts and can be opened with funds either
remitted from abroad or generated in India. The amount in such accounts is non-repatriable.
Fully Convertible Non-Rupee (FCNR) accounts are similar to the NRE account except that the funds are
held in foreign currency like USD, GBP, etc.

6. Does NRI need any approvals from the Reserve Bank of India to invest in mutual fund
schemes?
Yes. Specific approval has to be taken from RBI. However, most of the AMCs have taken the permission
for NRI investments in their schemes; hence no permission is required for investing in the schemes of those
AMCs.

Only OCBs and FIIs require prior approvals before investing in our schemes.

7. Can NRI invest in foreign currency?

No. All investments have to be in Indian Rupees. A convenient way to invest would be through NRE
account.

8. How to redeem funds?

In case of open-ended mutual fund schemes, simply fill up the redemption slip and send it to our offices or
Investor Service Centres of AMCs. The cheques are normally mailed to within 3 to 5 business days from the
day of receipt of the redemption request.

In case of close-ended mutual fund schemes, the redemption slip has to be sold at the stock exchange
 where the scheme is listed through a registered stock exchange member.

9. How will the redemption proceeds be paid?

The redemption proceeds will be paid by means of a Rupee cheque payable to the NRE account of the
investor, or else by a US dollar draft drawn at the then current rates of exchange subject to RBI procedures,
where investments have been made on a repatriation basis.

Where investments have been made on non-repatriation basis, redemption proceeds will be paid by
means of a Rupee cheque payable to the investor's NRO account.

Accompanying the redemption proceeds is an updated account statement, a TDS certificate and a covering
letter that mentions whether the funds were invested out of NRE/FCNR/NRO accounts. The tax on capital
gain is deducted (as explained below) after taking into consideration indexation benefits wherever
applicable.

10. Can NRI repatriate their earnings on redeeming from mutual fund schemes?
If the investment is made on a repatriation basis, the net income or capital gains (after tax) arising out of
investment are eligible for repatriation subject to some compliance.

If the investment is made on a non-repatriation basis, only the net income, that is, dividend (after tax),
arising out of investment is eligible for repatriation.

11. Can NRI enroll in Systematic Investment Plan (SIP)?

Yes.

12. How to get updated on the performance of the schemes?

NAVs of all schemes are updated on AMFI web site every day

TAX SLAB ON CAPITAL GAIN

1. Can NRI gift units of mutual fund schemes to their relatives in India?
Yes

2. Is the indexation benefit available to NRIs?

Yes, in case units are held for more than twelve months

3. What is the tax rate on short-term capital gain?

In case of non-resident non-corporates - 30% plus

In case of foreign companies - 40% plus

4. Tax slab on capital gain

Tax Rates* under the Act TDS Rate* under the Act
 NRIs
/
PIOs
/
Resi
other
Residents NRIs / PIOs FIIs dent FIIs
Non
s
FII
non-
resid
ents
30%
for
30%
non
without
resid
indexati
ents
Short on
non
Term benefit
corpo
Capital rate,
Gain
Units of a non
Taxable at normal rates of tax
equity oriented NIL 40% NIL
applicable to the assessee
fund for
non
resid
(u/s ent
115AD) corpo
rate,

(u/s
195)

units of an
10% on redemption of units where STT is
equity oriented Nil
payable on redemption (u/s 111A)
fund

10%
with no 20%
10% without indexation, or 20% for
units of a non indexati
with indexation, whichever is lower non
equity on
Long oriented benefit NIL resid NIL
ents
Term fund
(u/s
Capital (u/s 195)
(u/s 112)
Gain ** 115AD)

units of an Exempt in case of redemption of units where

equity oriented Nil Nil
fund STT is payable on redemption [u/s 10(38) ]

*Plus surcharge as applicable: corporate, co-operative societies, firms and local authorities: 10%;
Individuals/HUFs/BOIs/AOPs, with total income exceeding Rs.10, 00,000: 10%; Artificial juridical person: 10%.
** Capital Gains on redemption of units held for a period of more than 12 months
from the date of allotment.
*** As per section 111A of the Act, effective from 1/10/2004 short-term capital
gains on equity oriented fund is chargeable to tax at a Lower rate of 10 percent.
• Long Term Capital Gains arising from redemption of unit of a non equity oriented fund are exempt from tax, if
gains are invested in specified bonds within 6 months from the date of redemption, under Section 54EC of the
Act or if gains are invested in eligible equity issues within 6 months from the date of redemption, under Section
54ED of the Act.

In order for the unit holder to obtain the benefit of a lower rate under the DTAA, an eligibility certificate from
unit holder’s Assessing Officer should be provided to the Fund

1. What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that
pools up the money from individual / corporate investors and invests the same on behalf of the investors
/unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the
profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.

2. Which was the First Mutual Fund to be set up in India?

Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its
operations in 1964 with the issue of units under the scheme US-64.

3. Who is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above.
All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation
formed under a separate Act of Parliament.

4. What are the broad guidelines issued for a MF?

SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual
funds :
 (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management
Companies (AMCs).
(2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of
Directors.
(3) The net worth of the AMCs should be at least Rs.5 crore.
(4) AMCs and Trustees of a MF should be two separate and distinct legal entities.
(5) The AMC or any of its companies cannot act as managers for any other fund.
(6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
(7) All MF schemes should be registered with SEBI.
(8) MFs should distribute minimum of 90% of their profits among the investors.
(9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code
for mutual funds.

5. How do mutual funds diversify their risks?

According to basis financial theory, which states that an investor can reduce his total risk by holding a
portfolio of assets instead of only one asset. This is because by holding all your money in just one asset,
the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets,
this risk is substantially reduced.

6. Can mutual funds assumed to be risk-free investments?

No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same
risk as investing in the markets, the only difference being that due to professional management of funds
the controllable risks are substantially reduced.

7. What are the types risks involved in investing in mutual funds?

A very important risk involved in mutual fund investments is the market risk. When the market is in
doldrums, most of the equity funds will also experience a downturn. However, the company specific risks
are largely eliminated due to professional fund management.

8. What are the different types of funds offered by fund house?

Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details
about the different funds and their features please visit our mutual fund glossary.

9. What are the different types of plans that mutual fund offers?

That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A
dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where
these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared
 and the investor only gains through capital appreciation in the NAV of the fund.

10. What are open-ended and closed-ended mutual funds?

In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to
enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset
value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial
offer.

11. What is the investor’s exit route in case of a closed-ended fund?

According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock
exchange. Thus the secondary market provides an exit route in case of closed-ended funds.

12. Why should one choose to invest in a mutual fund?

For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds,
mutual funds offer a viable investment alternative. This is because:
(1) Mutual Funds provide the benefit of cheap access to expensive stocks
(2) Mutual funds diversify the risk of the investor by investing in a basket of assets
(3) A team of professional fund managers manages them with in-depth research inputs from investment
analysts.
(4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate
information which individual investors cannot access.

13. How investors invest in Mutual Funds?

One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual
funds in that particular town/city. An application form has to be filled up giving all the particulars along with
the cheque or Demand Draft for the amount to be invested.

14. What are the parameters on which a Mutual Fund scheme should be evaluated?

Performance indicators like total returns given by the fund on different schemes, the returns on competing
funds, the objective of the fund and the promoter’s image are some of the key factors to be considered
while taking an investment decision regarding mutual funds.

15. What is a Systematic Investment Plan and how does it operate?

A systematic investment plan is one where an investor contributes a fixed amount every month and at the
prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16. What are the benefits of s Systematic Investment Plan?

A systematic investment plan (SIP) offers 2 major benefits to an investor:

(1) It avoids lump sum investment at one point of time
(2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost
averaging. This means that (3) at lower prices you end up getting more units for the same investment.

17. What is the difference between mutual funds and portfolio management schemes?

While the concept remains the same of collecting money from investors, pooling them and investing the
funds, the target investors are different. In the case of portfolio management the target investors are high
networth investors while in case of mutual funds the target investors are the retail investors.

18. Is investor eligible for rebate on income tax by investing in a MF?

Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88
of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In
such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.

19. Do investments in mutual funds offer tax benefit on capital gains?

Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then
such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income
Tax Act.

20. Do mutual fund investments attract wealth tax?

No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from
Wealth Tax.

21. If I gift mutual fund units, does it attract gift tax?

No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer
chargeable to Gift Tax.

22. Is dividend earned from mutual funds exempt from income tax?

Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the
fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.

23. What are my major rights as a unit holder in a mutual fund?

Some important rights are mentioned below:

 (1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to
the dividend declared.
(2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
(3) They are entitled to receive redemption cheques within 10 working days from the date of redemption.
(4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
(5) 75% of the unit holders can pass a resolution to wind-up the scheme.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

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Terms Description
It is the document issued by the mutual fund, giving details of various
Account Statement
transactions and holdings of an investor in schemes of the fund.

Adjusted NAV (Total Return)
Age of Fund
Alpha Coefficient
The Net Asset Value of a unit adjusting for all changes caused due to dividend
declaration, bonus etc. assuming reinvestment of distributions made to the
investors at the prevailing NAV.
The time elapsed since the inception of the fund.
Defined by Jenson in his portfolio evaluation model, it is the excess return of
the fund above risk adjusted market return, given its level of risk as measured
by beta. An investment with a positive alpha indicates that the fund has
performed better than expected and a negative alpha indicates that the fund

Annual Report
Annual Return
Annualized Returns
Applicable NAV
Asset Allocation
Asset Management Company
(AMC)
Automatic Investment Plan
Automatic reinvestment plan
Average cost method
Average Credit Quality
has under performed, for the level of risk taken by it.
It is the yearly record of a Mutual Fund's performance in an year. Under SEBI's
guidelines, it is distributed to investors and/or shareholders.
The percentage change in net asset value of any fund over a horizon of one
year, assuming reinvestment of distribution such as dividend payment and
bonuses.
It is the absolute return over a period either greater or less than a year
aggregated to a period of one year.
The applicable NAV, if the application is received before that cut-off time on a
day as set by the fund. All investments or redemptions are processed at that
particular NAV. A different NAV holds if received thereafter.
It is a means of diversifying the risk associated with a fund and refers to the
distribution of total funds available with the fund into instruments of various
types such as stocks, bonds etc. based on the funds investmetn objective.
It is the investment manager for the mutual fund. It is a company set up
primarily for managing the investment of mutual funds and makes investment
decisions in accordance with the scheme objectives, deed of Trust and other
provisions of the Investment Management Agreement.
A plan introduced in mutual funds that enables the investor to give the
mandate of allotting fresh units at specified intervals (monthly, quarterly)
against which the investor provides post-dated cheques. On the specified
dates, the cheques are realized by the mutual fund and on realization,
additional units are allotted to the investor at the prevailing NAV.
An investment option available to mutual fund unitholders in which the
proceeds from either the fund's dividends, bonus etc. are automatically used to
buy more units of the fund.
It is the method of finding out the cost per unit by adding up all the costs
involved in purchasing all the units of investment and then dividing the sum by
the total number of units.
A measure of the creditworthiness of the debt securities held by a debt fund. It
is the weighted average of the credit ratings of the securities given their
relative weights in the portfolio. For these calculations, Government of India
securities, cash and call money instruments are taken as AAA credit quality
and non-rated debt instruments are taken as having BBB credit quality
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Terms Description
Balance Maturity Tenure Of A It is defined In the case of close-ended schemes as the balance period till the
Scheme
redemption of the scheme.

A class of mutual fund that aims at allocating the total assets with it in the
Balanced Funds
portfolio mix of debt as well as equity instruments.

It is a period in market when investors are on a selling spree and the share
Bear Market
prices are going down.

It is the platform or the parameter with which a scheme can be compared. For
Benchmark example, the performance of an index fund can be benchmarked against the
appropriate index specified by it.

It is the measure of the relative sensitivity of a stock or mutual fund to the

market. The market is assigned a beta of 1. The higher the beta, the more
sensitive the stock or fund is considered to be relative to the market as a
Beta
whole. In other words, funds with beta more than 1 will react more to any
fluctuaitons (whether upward or downward) in market than funds with beta less
than 1.

Usually a high priced scrip of a major corporation with a long, fairly stable
Blue Chip Stock record of earnings and dividend payments and with good expected future
growth..

An interest-bearing promise to pay a specified sum of money due on a specific

Bond
date in the future (maturity date).

Bonus is allocation of additional units to the investors on the basis of their

Bonus existing holdings. Basically, there is a split of existing units into more than one
unit resulting in the reduction of the NAV per unit.

A broker is an intermediary who guides the investors on one or more

Broker investment avenues available to an investor and facilitates the process of
investment.

It is the fee payable to a broker for acting as an intermediary in a transaction

Brokerage (normally a buy transaction). For example, brokerage is paid by a fund to a
broker for getting fresh investments from investors.

A index reflecting the stock prices of 30 companies listed on the Bombay

Stock Exchange (BSE) which is taken to be representative of the stock market
BSE Index
movement. It is usually considered as the benchmark forperformance
evaluation of equity funds.

Period during which the prices of stocks in the stock market keep continuously
Bull Market rising for a significant period of time on the back of sustained demand for the
stocks
 C D E F G H I J K L M N O P Q R S T U V W X Y Z

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Terms Description
The profit realizations on sale of securities and certain other capital assets
(including units of mutual funds) are called capital gains. The gains can be
Capital Gains classified into long-term or short-term depending on the period of holding of
the asset and are charged to tax at different rates. Gains on mutual fund units
held for a period of 12 months or more are long-term gains.

Certificate of Deposit (CD) is issued by scheduled commercial banks excluding

regional rural banks. These are unsecured negotiable promissory notes. Bank
Certificates of Deposit (CD)
CDs have maturity of 91 days to one year, while those issued by DFIs have
maturities between one and three years.

These schemes have a pre-specified maturity period. One can invest directly
in the scheme at the time of the initial issue. Depending on the structure of the
scheme there are two exit options available to an investor after the initial offer
period closes. Investors can transact (buy or sell) the units of the scheme on
the stock exchanges where they are listed. The market price at the stock
exchanges could vary from the net asset value (NAV) of the scheme on
Close-Ended Schemes
account of demand and supply situation, expectations of unitholder and other
market factors. Alternatively some close-ended schemes provide an additional
option of selling the units directly to the Mutual Fund through periodic
repurchase at the schemes NAV; however one cannot buy units and can only
sell units during the liquidity window. SEBI Regulations ensure that at least
one of the two exit routes is provided to the investor.

Commercial paper (CP) is a short term, unsecured instrument issued by

corporate bodies (public & private) to meet short-term requirements of working
Commercial Paper
capital. Maturity varies between 3 months to 1 year. CP is issued at a
discount. These can be issued to any

He is the officer appointed by the AMC to comply with various regulatory

Compliance Officer
requirement and to redress investor grieviences associated with the funds.

Contingent Deferred Sales
Charge (CDSC)
Corpus
Cost Of Churning/Turnover
It is the sales load charged by funds in the event of redemptions made within a
pre-specified period of purchase. This charge is linked to the period of unit-
holding and generally has an inverse relation with the holding period.
The total amount of money invested by all the investors in a scheme.
It refers to the costs associated with the churning (or changes made to the
 holdings) of the portfolio. Portfolio changes have associated costs of
brokerage, custody fees, transaction fees and registration fees, which lower
cost
the returns. The quantum depends on the managementstyle of teh fund
manager.

The annual rate of interest payable on a debt security, expressed as a

Coupon Rate
percentage of the face value of the instrument.

It refers to the load structure applicable currently on any fund. Funds keep
Current Load
revising the load structures from time to time.

The ratio of interest to the actual market price of the bond expressed as a
Current Yield
percentage: annual interest/ current market value = current yield
Custodian The keeper of a fund's securities and other assets.

In respect of all mutual funds regulated by SEBI, fresh subscriptions and

redemptions are processed at a particular NAV. Every fund specifies a cut-off
Cut off Time time in respect of fresh subscriptions and redemption of units. All requests
received before the cut-off times are processed at that day's NAV and
thereafter at the next day's NAV.

Terms Description
Funds that invest in income bearing instruments such as corporate
debentures, PSU bonds, gilts, treasury bills, certificates of deposit and
Debt /Income Funds
commercial papers. These funds are the least risky and are generally
preferred by risk-averse investors.

When the market price of a listed scheme is less than the actual NAV of the
Discount
units, then it is said to be tradiing at a discount.

Spreading the risk; Mutual funds spread investments among a number of

Diversification
different securities to reduce the risk inherent in investing.

A tax payable by a debt oriented mutual fund (a mutual fund that invests more
than 50% of its portfolio in the debt market) before dividend is distributed to the
Dividend Distribution Tax
unit holders. The current Dividend Distribution Tax is 10% plus the 10%
surcharge. There is no such tax applicable on open-end equity schemes.

The periodicity of dividend payout of a scheme. This is especially valid in the

Dividend Frequency case of an income/debt schemes like monthly income plans that normally have
a regularity in such distributions.
Dividend History The track record of dividends declared by a fund till date.

Total amount of dividend declared by a fund for a scheme divided by total

Dividend Per Unit
number of units issued to all the investors.
Dividend Plan
In a dividend plan, the fund pays dividend from time to time as and when the
 dividend is declared.

In a dividend reinvestment plan, the dividend is reinvested in the scheme itself

Dividend Reinvestment and is not paid out to the investors. That is, instead of receiving dividend in
cash, the unit holders receive units allotted to them at the Ex-dividend NAV.

It is an instrument issued by companies/ mutual funds to an investor for the

Dividend Warrant
purpose of payment of dividends.

It refers to the dividend earned per unit of a scheme at the prevailing per unit
Dividend Yield
price.

Mutual fund dividends are paid out of income from the scheme's investments
and can be announced out of the realized gains only. While dividends in the
Dividends
hands of the investor are free from tax, mutual funds are now required to pay a
"distribution tax" for dividends declared from debt-oriented schemes.

It is an American index similar to the BSE Index. Here the basket comprises
Dow Jones Index 30 blue chip American stocks whose prices are indicative of the health of the
economy.

Terms Description
It is the load charged by the fund when one invests into the fund. It increases the
Entry Load
price of the units to more than the NAV and is expressed as a percentage of NAV.

A special product offered by mutual funds. These schemes invest in equity i.e
shares and generally have a lock-in period of three years. The primary advantage
Equity Linked Savings Scheme
to investors is the rebate under Section 80 c of the IT act, whereby a maximum of
Rs 1 lakh invested in ELSS funds is not taxable.

Schemes where more than 50% of the investments are done in equity shares of
Equity Schemes
various companies.
Ex-Bonus NAV The NAV declared post record date in case of a bonus issue is the ex-bonus NAV.

It is the effective date of a dividend distribution. When the dividend is paid, the
Ex-Dividend Date
NAV of the fund drops by the amount of the dividend.
Ex-Dividend NAV The NAV declared post record date is the ex-dividend NAV.

It is the load charged by the fund when oneredeems the units from the fund. It
Exit Load reduces the price of the units to less than the NAV and is expressed as a
percentage of NAV.

The Expenses of a mutual fund include management fees and all the fees
Expense Ratio associated with the fund's daily operations. Expense Ratio refers to the annual
percentage of fund's assets that is paid out in expenses.

Terms Description
 These are short to medium term interest bearing instruments
issued by financial intermediaries and corporates. These
Floating Rate Bonds bonds are issued for minimum amount of Rs. 10,000 and in
multiples of Rs. 10,000 only. The typical maturity of these
bonds is 3 to 5 years.

A term used when mutual fund investors who have purchased

load funds switch from one fund family to another family of
Free Loading
funds without having to pay another sales charge. Not all
funds families have freeloading procedures.
Face Value The original issue price of one unit of a scheme

A commonly used mechanism for the taxation purpose of

redeemed mutual fund shares, it is an accounting method
First-In, First-Out (FIFO)
which assumes that the units purchased first are the units sold
first.

Classification of a scheme depending on the type of assets in

Fund Category which the mutual fund company invests the corpus. It could be
a growth, debt, balanced, gilt or liquid scheme
Fund Family All the schemes, which are managed by one mutual fund.

Fund Management The charge levied by an AMC on a mutual fund for managing
Costs
their funds.

Appointed by the AMC, he is the person who makes all the

Fund Manager
final decisions regarding investments of a scheme.

Terms Description
Securities created and issued by the Central Government and/or a State
Gilts/Government Securities Government, and may include securities unconditionally guaranteed by the
Government
Global Funds Mutual funds that invest in stocks of companies from all over the world

These are medium to long term obligations issued by RBI on behalf of

Government of India and various state governments. The RBI decides the cut-off
Government Securities
coupon on the basis of the bids received. These securities are issued by auction
process. On certain issues

Funds that invest only in government securities of different maturities. They offer
lower returns as the credit risk is virtually absent and there are no chances of
Gilt funds
government defaulting on its payment obligaitons. This effectiviely reduces the
yield on them.

A scheme where investments are made in equity and convertible debentures.

Growth scheme
They normally aim to provide capital appreciation over a period of time.
 The return assured by the mutual funds as a minimum return in certain income
Guaranteed Returns plans. The launch of plans offering guaranteed returns is now subject to certain
restrictions imposed by the SEBI.

Terms Description
They are mutual funds that invest primarily in fixed income
Income / Debt Funds securities and aim to provide reasonable returns with low
degree of risks.

A type of mutual fund in which the portfolios are constructed to

mirror a specific market index. Index funds are expected to
Index Funds provide a rate of return over time that will approximate or
match, but not exceed, that of the market which they are
mirroring.

The central government specifies an index linked to the

wholesale price index. The indices of two years (year of
purchase and the year of sale) are used for the purpose of
computing capital gains tax. The purchase price is multiplied
by the index of the year of sale and the product is divided by
Indexation
the index of the year of purchase. This benefit is available only
if the security has been held for more than 12 months. On sale
of equity-oriented mutual fund schemes, one can opt for
paying tax at the rate of a flat 10% or go in for paying 20%
after taking the benefit of indexation.

Defined as the fall in the value of a currency, it results in the

Inflation
rise in prices of goods and services over a period of time.

The chance that the value of assets or income will be

Inflation Risk
diminished as inflation shrinks the value of a currency.

Funds investing in assets or bonds/shares of companies from

emerging economies. These are not permissible in India due
International Funds /
Emerging Market Funds to regulations against investing abroad. Most of the schemes
of Foreign Institutional Investors (FII's) investing in India are
funds of this type.

Investment analysis and execution of investment plans in

Investment Management
keeping with certain objectives.
Investment objective The declared purpose of investment of a mutual fund scheme

The internal guidelines that a fund follows in investing the

Investment strategy
money received from the investors

a kind of sales charge that is paid before any amount gets

Initial Load
invested into the mutual fund during its Initial Offer.
 iSEC Bond Index (I- An index created by ICICI Securities as a benchmark for
BEX)
returns from debt instruments in the market.

Terms Description
Launch Date The date on which a scheme is first made open to the public for subscription

Funds investing only in short-term money market instruments including treasury

Liquid Funds /Money Market bills, commercial paper and certificates of deposit. The objective is to provide
Funds
liquidity and preserve the capital. Due to the low degree of risks available, they
generally provide lower returns than other avenues.

The cash and cash equivalent assets available with a fund to meet expenses and
Liquidity immediate redemption requirements of the investors. It refers to the ability to buy
or sell an asset quickly or the ability to convert to cash quickly.

A charge that may be levied as a percentage of NAV at the time of entry into the
Load
Schemes or at the time of exiting from the Schemes.

The period after investment in fresh units during which the investor cannot
Lock In Period
redeem the units. It is normally a key feature of Tax schemes.

Terms Description
The ratio of management expenses to the total funds under
Management Expense
Ratio management. It is usually specified in the offer document as a
percentage of teh assets under manaegment of the fund.

Management The charge made to a mutual fund for supervision of its

Fee/Expense
portfolio, usually expressed as percentage of assets.

It refers to the risk posed by the market in itself i.e. the risk
that the price of a security will rise or fall due to changing
Market Risk
economic, political, or market conditions, or due to a
company's individual situation.

The date upon which the principal of a security becomes due

Maturity or Maturity Date
and payable to the security holder.

Minimum Additional The minimum amount, which an existing investor should

Investment
invest for purchasing fresh units.

It is the minimum amount specified by a fund that should

Minimum Balance
remain invested in a scheme after any redemption.

It refers to the minimum amount required to be invested to

Minimum Subscription
purchase units of a scheme of a mutual fund.
 The smallest sum that an investor can withdraw (get
Minimum Withdrawal
redeemed) from the fund at one time.

It refers to a market for very short-term securities. Money

market instruments are forms of debt that mature in less than
Money Market a year and are very liquid in nature. Securities such as
Treasury Bills and Call Money make up the bulk of trading in
the money markets.

This is one of the special conditions where a minimum

quantity is specified for an order. The quantity of the trade
Minimum Fill (MF)
involving an order with a MF attribute should at least be this
minimum quantity specified.

Refers to Commercial Papers, Treasury Bills, GOI Securities

Money Market etc. with an unexpired maturity less than or up to one year,
Instruments
Call MSoney, Certificates of Deposit and any other instrument
specified by the Reserve Bank of India.

An investment company that pools money from its unitholders

and invests that money into a variety of securities, including
stocks, bonds, and money-market instruments. This
Mutual Funds
represents a way of investing money into a professionally
managed and diversified pool of securities that hopefully will
provide a good return on unitholders' money.

Terms Description
The value of fund's portfolio at market value less current liabilities divided by the
Net asset value (NAV) number of units outstanding. Net asset value is normally computed daily or weekly
and can be found in the financial section of the daily newspaper.
Nifty An index of prices of a group of fifty stocks listed on the NSE.
No-Load Mutual Fund or No-
Load Scheme It refers to the fund that does not charge any load for buying or selling its units.

The person(s) to whom the assets should be distributed upon the death of the
Nominee
account holder.

Part of the portfolio investment of a debt fund which is not making interest
Non Performing Investments payment or principal amount repayments in time. SEBI has now evolved a
valuation mechanism for assessing them.

Terms Description
Objective Of Investment
The purpose statement consisting of the goal and the avenues
 of investment released by the fund.

It is the official document issued by mutual funds prior to the

launch of a fund describing the characteristics of the proposed
Offer Document or
Prospectus fund to all its prospective investors. It contains information
required by SEBI pertaining to issues such as investment
objective and policies, services, and fees.

The period during which the initial offer to subscribe for the
Offering period
units of a scheme is open.

Funds that do not have any fixed maturity and are continuosly
open for subscription and redemption. The key features is
Open-Ended Fund
liquidity. One can conveniently buy and sell the units held at
the NAV related price.

The NAV disclosed by the fund for the first time after the
Opening NAV
closure of an NFO.

The funds set up abroad to channelise foreign investments in

Offshore Funds
the Indian capital markets.

A time period in the trading day for the different markets that
the exchange deals in. Order entry, matching, inquiries and
Open
other functions at the workstation will be allowed during this
period.

Scheme of a mutual fund where purchase or sale of units is

Open-End Scheme
allowed on a continued basis.

Payments (distributions) are from either income or capital

Optional Distribution gains. The unitholder of the fund may choose to take both,
either, or none, in cash or additional units.

The risk that a better opportunity may present itself after you
Opportunity Risk
have already committed your money elsewhere.

Terms Description
Pay-out day is the designated day on which securities and
Pay-out funds are paid out to the members by the clearing house of
the Exchange.

When the market price of a unit is more than the NAV it is said
Premium
to be trading at a premium.
Public Sector
PSU Bonds are medium and long term obligations issued by
Undertakings (PSU)
bonds public sector companies where the government share-holding
 is generally greater than 51% or more. Some of the PSU
bonds carry tax exemptions also. Minimum maturity is 5 years
for taxable bonds and 7

The price at which a mutual fund's units can be purchased.

Purchase Price or
Offering Price The asked or offering price means the current net asset value
per unit plus sales charge, if any.

Performance of an investment indicates the returns from an

investment. The returns can come by way of income
Performance
distributions as well as appreciation in the value of the
investment.
Portfolio It refers to the total investment holdings of the fund.

It refers to the changes made to the portfolio keeping in view

Portfolio Churning the market conditions. It includes both buying and selling of
holdings and is aimed at giving a better yield to the investor.

Also known as the Fund Managers, they are the specialists

Portfolio Managers employed by Mutual Fund/AMC to invest the pool of money in
accordance with the fund's investment objectives.

An offer document by which a mutual fund invites the public

for subscribing to the units of a scheme. This document
Prospectus
contains information about the scheme and the AMC so as to
enable a prospective investor make an informed decision.

Terms Description
Reserve Bank of India, established under the Reserve Bank of India Act, 1934, is
RBI/ Reserve Bank of India
the Central Bank in India.

The rating is a symbolic indicator of the current opinion of the relative capability
and timely servicing of debts and obligations. Ratings are based on an objective
Rating analysis of the information. The rating could be done in respect of the
creditworthiness of debt instruments, risk of loss in an investment or the
performance of an investment.

The date by which mutual fund holders are registered as unit owners to receive
Record Date
any future dividend or capital gains distribution.

Buying back/cancellation of the units by a fund on an on-going basis or on

Redemption Of Units maturity of a scheme. The investor is paid a consideration linked to the NAV of the
scheme.
Registrar or Transfer Agent
The institution that maintains a registry of unitholders of a fund and their unit

Repurchase
Repurchase Date /Period
Repurchase price
Right of Accumulation
Recurring Investment Facility
Recurring Withdrawal Facility
Redemption fee
Redemption Price
Registrar or Transfer Agent
Risk-Free
Risk Adjusted Returns
Terms
Sale price
Scheme Objective
ownership. Normally the registrar also distributes dividends and provides periodic
statements to unitholders.
Buying back/ cancellation of the units by a fund on an ongoing basis or for a
specified period or on maturity of a scheme. The investor is paid a consideration
linked to the NAV of the scheme
In the case of close-ended schemes, the specified date on which or period during
which the investor can redeem units held by him in the scheme before the
maturity of the scheme.
The price of a unit (net of exit load) that the fund offers the investor to redeem his
investment.
Right provided to the unitholder of reduced sales charge on the units purchased if
the total number of the units bought over a period of time exceeds a certain pre-
determined amount.
An arrangement provided by the fund management whereby regular purchases of
small or large numbers of units may be allowed. The plan sometimes also
provides for automatic reinvestment of income dividends and capital gains
distribution.
The arrangement that the fund provides whereby shareholders can receive
periodic payments in a specified amount. These amounts may be more or less
than the income of the fund.
A kind of sales charge, also referred to as a back-end load, imposed when an
investor redeems, or sells back units of the fund.
The price at which open-ended schemes repurchase their units and close-ended
schems redeem their units on maturity. Such prices are NAV related.
Firm responsible for maintaining register of unit holders or shareholders.
Absence of credit risk in a security. Usually Government or Government
guaranteed securities are only considered to be risk free.
The expected returns from an investment depend upon the risk involved in the
investment. For the purpose of comparing returns from investments involving
varying levels of risk, the returns are adjusted for the level of risk before
comparison. Such returns (reduced for the level of risk involved) are called risk-
adjusted returns
Description
The price at which a fund offers to sell one unit of its scheme to investors. This
NAV is grossed up with the entry load applicable, if any.
The purpose statement consisting of the goal and the avenues of investment
released by the fund.
 It refers to the portion of assets of a fund which is invested in a particular well-
Sector Allocation defined segment of the economy, like Information Technology, pharmaceuticals,
utilities, media, telecommunications, etc.

Sector Funds are mutual funds that are established to focus and invest in the
stocks of specific sectors of the economy, such as pharmaceuticals, chemicals, or
Sector Funds
information technology. This is normally specified in the offer document of the
funds.

Generally, an instrument evidencing debt of or equity in a corporation in which a

Security person invests. The term includes notes, stocks, bonds, debentures or other
forms of negotiable and non-negotiable evidences of indebtedness or ownership.

The Sharpe ratio measures the risk-adjusted return of a fund. Simply put, the ratio
measures the variability of ' excess returns' (defined by returns of the fund over
Sharpe Ratio the 'risk less' 91 day T-bill). Mathematically, the formula takes a fund's return in
excess of a risk-free investment and divides this by the standard deviation of the
returns. The higher the Sharpe ratio, the better the fund

A sponsor is the person who, acting alone or in combination with another body or
corporate, establishes a mutual fund and applies to SEBI for its registration. The
Sponsors
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.

A program that allows an investor to provide post-dated cheques to the mutual

Systematic Investment Plan
(SIP)/ Recurring invest
fund to allot fresh units at specified intervals (usually monthly or quarterly). On the
specified dates, the cheques are realized by the mutual fund and additional units
at the prevailing NAV are allotted to the investor. This enables him to invest as
little as Rs 1000 a month and take advantage of rupee cost averaging.

Systematic Transfer Program A plan that allows the investor to give a mandate to the fund to periodically and
(STP)
systematically transfer a certain amount from one scheme to another.

Systematic Withdrawal Plan
(SWP)/Recurring withdra
A plan offered with some schemes under which post-dated cheques for fixed
amounts (as may be fixed by the fund) are issued to the investors for monthly, bi-
monthly or quarterly withdrawals. The withdrawals are as per the requirements of
the investor specified by him/ her at the time of investment

Terms Description
Total Assets Under Management The market value of the total investments of a fund as on a particular date

Return on an investment, taking into account capital appreciation, dividends or

Total Return interest, and individual tax considerations adjusted for present value and
expressed on an annualised basis.

A legal arrangement under which property and assets may be held and managed
Trust for the benefit of another person. Mutual funds in India are registered under the
Trusts Act.
 A person or a group of persons having an overall supervisory authority over the
Trustee fund managers. They ensure that the managers keep to the trust deed, that the
unit prices are calculated correctly and the assets of the funds are held safely.

The extent to which the fund's portfolio is turned over during the course of a year.
Turnover High turnover results in greater investment expenses and therefore in an erosion
of the value of share assets.

A measure of the fund's trading activity calculated by dividing total purchases or

Turnover Rate sales of portfolio securities (whichever is lower) by the fund's net assets over a
period of time.

Terms Description
Unit A Unit represents one undivided share in the assets of the Schemes.

A special type of fund, usually a bond fund, that has a fixed portfolio, shares or
Unit Trust "units" are sold when the fund is formed, and the portfolio remains fixed until the
maturity of the underlying securities.
Unitholder A person who holds Unit(s) under a Mutual Fund.

Terms Description
Stocks that are considered to be undervalued based upon such ratios as price-to-
book or price-to-earnings (P/E). These stocks generally have lower price-to-book
Value Stocks
and price-earnings ratios, higher dividend yields and lower forecasted growth
rates than growth stocks.

Terms Description
Distributions form investment income, usually expressed as a percentage of net
asset value or market price. Unlike total return, yield has the single component of
Yield
investment income and does not include capital gains distributions or capital
appreciation of underlying shares.

The Yield Curve gives the relationship at a given point in time between yields on a
group of fixed-income securities with varying maturities viz. treasury bills, notes,
Yield Curve
and bonds. The curve typically slopes upward since longer maturities normally
have higher yields, although it can be flat or even inverted.

Used to determine the rate of return an investor will receive if a long-term,

interest-bearing investment, such as a bond is held to its maturity date. It takes
Yield To Maturity
into account purchase price, redemption value, time to maturity, coupon yield and
the time between interest payments.
 Terms Description
A bond where no periodic interest payments are made. The investor purchases
the bond at a discounted price and receives one payment at maturity. The
maturity value an investor receives is equal to the principal invested plus interest
Zero-Coupon Bond
earned compounded semi-annually at the original rate to maturity. Interest income
from zero-coupon bonds is subject to taxes annually even though no payments
will be made.