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  Active Portfolio Management – Is a systematic and proactive approach to investment with the goal of beating the market. This strategy is based on the premise that markets are not efficient and that there is scope to earn abnormal profits through an active investment strategy.
  Annualized Return – The return a fund would have generated over a year on a compounded basis. This method is the best indicator to measure the performance of a fund.
  Asset Management Company (AMC) – A Company registered with SEBI, which takes investment/ divestment decisions for the mutual fund, and manages the assets of the mutual fund. e.g. for Sun F&C mutual fund , the AMC is Sun F&C Asset Management (India) Pvt. Ltd.
  Asset Allocation – It is the process of allocating the overall corpus to different assets like equities, bonds, real estate, derivatives etc.
  Average Maturity – This term is used in the context of debt funds. It indicates the average life of the debt securities held in a fund's portfolio. If the fund has mainly invested in long-term debt papers, the average maturity will be high and vice versa. Generally, average maturity of a long-term income fund is higher than that of the short-term income fund. A fund having high average maturity is more prone to interest rate risk than the fund having low average maturity.
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  Back-end Load – A kind of redemption charge that an investor has to pay for withdrawing his money from the mutual fund. It is basically imposed to discourage investors from exiting the fund. It is also popularly referred to as an Exit Load.
  Balanced fund – A fund that invests substantially both in debt and equity.
  Bottom-up Investing – It is a strategy of selecting the company for investment first and then cross checking it by evaluating factors pertaining to the industry and the economy. It is the opposite of the top-down approach to investing.
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  Capital Gains – Gain made by an investor when he sells an investment at a price higher than the acquisition price. Capital Gains= sale price — purchase price
  Closed-ended fund – A fund where investors have to commit their money for a particular period. In India these closed-ended funds have to necessarily be listed on recognized stock exchanges which provides an exit route.
  Contingent deferred sales charge (CDSC) – An exit charge permitted under the regulations for a no-load scheme.
  Continuous Offer Period – Is the date from which the units are available for sale and repurchase at a price linked to NAV of the scheme.
  Corpus – The total investable funds available with a mutual fund scheme at any point of time.
  Credit Risk/ Default Risk – It is the risk associated with a debt instrument which arises out of the probability of the issuer of a fixed income security defaulting on payment of interest and repayment of principal. Generally, government securities are known to have low level of credit risk when compared to that of corporate bonds.
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  Dated Security – A debt instrument that is long term in nature and has a fixed date of redemption.
  Debt fund – A fund that invests in debt securities like Government securities, Treasury Bills, corporate Bonds etc. These funds are generally preferred by investors wanting steady income and not willing to take higher risks.
  Dematerialization – The process of converting the physical /paper shares in Electronic form. SEBI had made it compulsory to get the shares of some companies dematerialized. In this process the investor opens an account with a Depository Participant (DP) and the number of shares the investor holds is shown in this account.
  Depository Participant – An authorized body who is involved in dematerialization of shares and maintaining of the investors accounts.
  Discount/Premium to (Net Asset Value) NAV – It is the difference between the unit price and NAV. If the price is higher than the NAV, the units are trading at premium: if the price is lower, the units are trading at a discount.
  Diversification – It is the investment strategy of not putting all one's eggs in one basket. By diversifying a portfolio across different industries, overall risk of the portfolio is reduced.
  Dollar Cost Averaging – The strategy of dividing the investible amount into a number of equal parts and buying at regular intervals to take advantage of lower prices. This strategy is more beneficial in a bear phase.
  Downside Deviation – This tool measures the downside movement of the Fund NAV from a specified level. Some experts opine that downside deviation is a better tool for measuring volatility for an investor than standard deviation. This is because standard deviation includes both upside movement (profits) and downside movement (losses). Any investor always welcomes gains but averse to losses. Downside deviation only considers downward movement of the fund NAV, which represents true risk for an investor.
  Downside Probability – It calculates the probability that the portfolio would get a negative return.

Downside Probability = Total number of negative returns in a period/ Total number of returns in a period.

While higher figure is considered bad, lower figure is considered favourable.

A statistical tool, frequency distribution method is generally used for computing the probability.

  Duration – Duration measures the debt portfolio's sensitivity to changes in interest rate. In other words, it shows how much the value of a debt portfolio changes with a change in interest rates. It is calculated as the per cent change in the portfolio's price with a change in the yield of 1 per cent. Funds which mainly invest in long-term bonds have higher duration than funds investing in short-term papers. Therefore, short-term funds have low level of interest rate risk.
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  Efficient Portfolio – A portfolio which ensures maximum return for a given level of risk or a minimum level of risk for an expected return.
  Equity/Growth fund – A fund that invest primarily in equities and has capital appreciation as its investment objective.
  Expense Ratio – Expense ratio is defined as the ratio of total expenses of a fund to the net assets of the fund. An expense ratio of 1.45 means that the fund spends Rs. 1.45 per Rs. 100 of the net assets, towards operating expenses and management fees to service providers and AMC. Expense ratios are also sensitive to the size and type of fund. Larger the fund, lower the expense ratio. Equity funds have higher expense ratio than bond funds.
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  Factor Fund – It is a mutual fund that has a core philosophy of investing in a particular factor or style in the market. They are also referred to as Style Funds. Examples of factor funds are Mid-cap funds, Low P/E funds, Growth funds etc.
  Financial Pyramid – An investment plan in the shape of a pyramid structure where the safest investments are at the base and the riskiest investments at the peak.
  Fixed Income Security – A type of security that pays fixed interest at regular intervals. These comprise gilt-edged securities, bonds (taxable and tax-free), preference shares and debentures. Less risky than equity shares and have little scope for capital appreciation.
  Front-End Load – An initial amount charged by a fund for its administrative expenses or for paying commissions to brokers. If the charge is made at the termination or redemption, it becomes a back-end load.
  Fund Manager – A professional manager appointed by the Asset Management Company to invest money in accordance with the objects of the scheme.
  Fundamental Analysis – A method of investment analysis based on the fundamentals like turnover, net profit, growth, and vision of a company. The boom or depression of the stock markets are not considered in this analysis.
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  Gilt-edged Security – Government securities and bonds, usually with a low interest rate. Considered safest investments, as the government security is free from default risk. Originally such certificates were edged with gold and hence the name.
  Gilt fund – Funds that invest predominantly in government securities and treasury bills. It is good for investors who desire safety of principal and adequate liquidity.
  Go-Go Fund – A mutual fund which invests in highly risky but potentially profitable investments. Such a fund usually has a short life.
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  Hedging – It is a strategy used to off-set market risk whereby one position protects another. Typically, equity funds will use hedging when they expect that the prices will fall. It results in reduced equity exposure of the overall portfolio. Strategies adopted could be: Selling stocks futures, when the same stock is held in cash market; buying a put option when stock is held in the portfolio.
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  Income Fund – A fund that usually invests in debentures, bonds, and high dividend shares. Preferred by investors who wants regular income. It pays dividends to the investors out of its earnings.
  Indexation – Indexation means Adjusting the Long Term Capital Gains for inflation by applying an appropriate factor from Cost Inflation Index (notified by Govt), to the original investment. Indexation helps to lower capital gains and hence lower the tax. With the help of FMPs investors can get Indexation benefit, which is not available in case of fixed deposits. One needs to stay invested with that avenue for more than 365 days to avail the benefit of indexation.
  Index Fund – A fund whose portfolio is benchmarked against a popular index like the BSE Sensex or the BSE Natex. Such an investment philosophy reflects the belief that the market is efficient and trying to beat the market over the long term is futile.
  Initial Issue Expenses – Expenses incurred towards sales, marketing and other promotional expenses of a new fund are known as initial issue expenses.
  Initial Offer Period – The dates on which the initial subscription to the units of the scheme can be made. It is similar to the IPO of an equity issue. This initial offer period is followed by a continuous offer period.
  Interest Rate Risk – The change in the price of a debt security due to changes in the market interest rates is the interest rate risk. For debt oriented mutual fund schemes, this interest rate risk affects the NAV of the fund. A rise in the interest rates leads to a fall in the price of a fixed income security.
  Interim Dividend – An advance installment of the dividend finally declared. More often one, but sometimes two such payments are made. The final dividend is often at least equal, and sometimes more. The interim dividend is a fair indication of a company's profitability, during the working year.
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J & K
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  Liquid Fund – A fund that invests its corpus in short term instruments like call markets, treasury bills, Commercial Paper (CP), Certificate of Deposit (CD).
  Liquidity Risk – It is the risk in a fixed income security as well as in equities that these securities may not be sold in the market at close to their value. Liquidity risk is characteristic of narrow markets like India.
  Loads –
  • Front-End Load / Entry Load: A commission or sales fee charged at the time of the initial purchase of a mutual fund. Due to this, the initial amount which finally gets invested in a fund is reduced to the extent of entry load.
  • Back-End Load / Exit Load: It is a kind of redemption charge that an investor has to pay for withdrawing his money from the mutual fund. It is basically imposed to discourage investors from exiting the fund. This amount is deducted from the redemption proceeds.
  • Contingent deferred sales charge (CDSC): Some funds may also charge different amounts of loads to the investors; depending upon how many years the investor has stayed with the fund. The longer the investor stays with the fund, lesser the amount of exit load is charged. This is called contingent load.
  Long-term Capital Gains Tax – Tax that has to be paid on a capital gain , when the investor has held the investment for a period more than 365 days.
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  Market Capitalization – Represents the market value of the company. It is a product of the current market price and the number of shares outstanding.
  Market Instrument – A fully negotiable instrument for short-term debt.
  Market Lot – A fixed minimum number of shares, in which or in multiples of which, shares are bought and sold on the stock exchange. The advent of dematerialization of shares will do away the significance of market lot.
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  Net Asset Value (NAV) – This is calculated as total assets minus all expenses and divided by the number of outstanding units. This is the main performance indicator for a mutual fund, especially when viewed in terms of appreciation over time.
  No-Load Fund – Shares of an open-ended fund, which can be bought directly from the fund without any sales charge or brokerage. US-64 is an example of a no-load fund.
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  Offer Price – The price at which units can be bought from a fund.
  Offshore Fund – A fund domiciled outside the country where investments are made. It is often a tax haven, not subject to the tax laws of the holder's country.
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  Pari Passu – Ranking equally. After conversion of debentures into shares, the new shares created carry the same rights as the existing shares of the company to receive dividends, rights and bonus shares, and to participate in the company's profit and loss.
  Passive portfolio management – Exactly the reverse of active portfolio management. The portfolio manager assumes that markets are efficient and all information is already analyzed and reflected in the prices of shares. This strategy is based on the premise that it is impossible to consistently beat the market.
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  Rating – Evaluation of credit risk in fixed income securities. This evaluation is specific to the security rated and is done in India by Crisil, Icra, Care and Duff & Phelps.
  Record Date – It is the date announced by the company/mutual fund, which is a cut-off date for corporate benefits like dividends, rights, bonus etc. Only investors whose names appear in the company's registers on that date are eligible for the said benefits.
  Reinvestment Plan – It is a plan where the earnings of a mutual fund scheme are reinvested back in the fund.
  Reinvestment Risk – It is the risk that the interest on fixed income instruments cannot be reinvested at the same rate. This problem becomes pronounced in a falling interest rate scenario.
  Risk Adjusted Returns – Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. The most important and widely used measures of risk adjusted performance are: Sharpe Ratio, Sortino Ratio, Treynor Measure, Jenson's Alpha and Fama.
  Risk-Free Rate – Return generated on debt instruments having no credit risk. Generally returns on T-bills are used as risk-free rates.
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  Sector fund – Such funds invest only in stocks belonging to a specific industry usually aimed at growth. For e.g. Kothari Pioneer Infotech Fund. Sector funds are generally considered to be risky in nature.
  Securities – Financial documents which give the owner specific rights of ownership; these include: equity and preference shares, debentures, treasury bills, government bonds, units of mutual fund, and any other marketable documents.
  Securities Transaction Tax (STT) – Securities transaction tax is a tax which is payable by the investors or dealers for dealing in securities. In the context of mutual funds, STT at the rate of 0.25% is payable only at the time of redemption of an equity fund.
  Sharpe Ratio – It is one of the measures of showing risk-adjusted returns. This ratio shows excess returns generated by the fund on the total risk associated with it. If the ratio is 1.2, it means that the fund has undertaken one unit of total risk to generate 1.2 units of return (over and above the risk-free rate). Higher the ratio, the better it is. This ratio uses standard deviation to represent total risk associated with the fund.
  Short-Term Capital Gains Tax – Tax that has to be paid on a capital gain, when the investor has held the investment for a period less than 365 days.
  Shorting – Shorting involves selling a stock that the seller doesn't own. This strategy is adopted when there is an expectation of the market price going down, one should sell a future stock A.
  Sinking Fund – Money regularly set aside in a separate fund and invested by a company for the repayment of debt instruments (fixed deposits, debentures, other loans) or the redemption of preference shares, or for replacement of assets.
  Sortino Ratio – It is also one of the measures of showing risk-adjusted returns. This is a slightly advanced version of Sharpe Ratio where downside deviation is used to represent risk associated with the fund instead of Standard Deviation (used in Sharpe Ratio). If the ratio is 0.8, it means that the fund has undertaken one unit of downside risk to generate 0.8 units of returns in excess of the risk-free rate. Higher the ratio, the better it is.
  Sponsor – Sponsor is the parent organization that contributes the initial capital of the asset management company (AMC). e.g. Kotak Mahindra Finance is the sponsor for Kotak Mahindra Mutual Fund.
  Standard Deviation (SD) – SD measures the entire risk of a given fund; it provides good indication of volatility. The higher the SD, the greater the potential for volatility.
  Switching – Transferring from one scheme to another in a group of schemes operated by a Mutual Fund, where the rules so permit. A switching fee may or may not be charged.
  SWOT Analysis – A type of fundamental analysis of the health of a company by examining its strengths(S), weakness (W), business opportunity (O), and any threat (T) or dangers it might be exposed to.
  Systematic Risk – This is the market risk that a security faces and is essentially non-diversifiable in nature. This risk is caused by macro level factors like changes in inflation, interest rates, budget announcements etc.
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  Tax saving fund – Such funds allow the income tax payees to claim a rebate under the Income Tax Act.
  Technical Analysis – A method of prediction of share price movements based on a study of price graphs or charts on the assumption that share price trends are repetitive. Since investor psychology follows a certain pattern, what is seen to have happened before is likely to be repeated. The technical analyst is not concerned with the fundamental strength or weakness of a company or an industry; he only studies price and volume behavior.
  Top-Down Investment – An approach to stock selection which evaluates the prospects of the economy first, then the prospects of the industry and then finally the prospects of a particular company to take an investment decision. It is the opposite of a bottom-up approach to investing.
  Transfer Agents – Professional firms, now mostly computerized, which maintain the records of shareholders of their client companies.
  Treasury Bills – These are bills of exchange, i.e., IOUs, issued by the Reserve Bank of India for short-term loans, 91 days to 364 days.
  Trustee – The trustee is the legal owner of the mutual fund. The trustee takes into custody or under its control all the capital and property of every scheme of the mutual fund and hold it in trust for the unitholders of the scheme.
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  Unamortised Expenses – Generally, initial issue expenses are charged against the fund over a period. As per the latest regulation, SEBI allows closed-ended schemes to written off initial issue expenses over the life of the fund. As on any day, the extent of initial issue expenses which has not been written off is known as unamortized expense. For example, a fund incurs a 3% initial issue expenses. It has to charge 1% against the fund each year. Therefore, at the end of year two, 1% would be the remaining expense which has not been charged against fund. This is known as unamortized expense.
  Unsystematic Risk – This is the proportion of risk that is specific to a particular company. This diversifiable risk could arise due to company specific factors like operational factors, financial factors, labor unrest etc.
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  Value Investment – Investment in shares whose intrinsic value is above their market price. Fundamental analysts often make recommendations of value investment, as they can spot undervalued shares.
  Vulture Fund – It is a fund that takes over the non-performing assets of bank or financial institution at a discount and issues pass-through units to the investors.
  Venture Capital Fund – A limited company formed to provide venture or risk capital to new industries.
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W, X & Y
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  Zero Coupon Bond – A coupon is an interest warrant attached to a debt instrument, and the coupon rate is the rate of interest. A zero-coupon bond carries no interest, but is sold at a discount to its face value, which is the maturity value. The difference between the discounted price and the maturity value represents the interest on the bond.
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