Alpha measures the difference between a fund's actual returns and its expected performance, given its level of risk (as measured by beta). A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager. There are limitations to alpha's ability to accurately depict a manager's added or subtracted value. In some cases, a negative alpha can result from the expenses that are present in the fund figures but are not present in the figures of the comparison index. Alpha is dependent on the accuracy of beta: If the investor accepts beta as a conclusive definition of risk, a positive alpha would be a conclusive indicator of good fund performance. Of course, the value of beta is dependent on another statistic, known as R-squared.
Shares of non-US companies traded in American stock exchanges in US dollars. ADRs work like any other share that we know of. They are negotiable receipts held in a US bank representing a specific number of actual shares (called ADS). For the American public ADRs simplify investing. So when Americans purchased Infosys stocks listed on Nasdaq, they could do so directly in dollars, without converting them from rupees. Such companies are required to produce financial results according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company.
The expenses incurred, during a particular year, by Asset Management Company for managing the funds.
Attempting to profit by exploiting price differences of identical or similar financial instruments on different markets or in different forms.
The process of diversifying the investments in different kinds of assets such as stocks, bonds, real estate, cash in order to optimize risk.
A fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, gold bullion and real estate stocks. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.
Balanced fund include both equity and debt schemes, with 50-75 per cent in equity and the rest in debt.
An unmanaged group of securities whose performance is used as a standard to measure investment performance. Commonly known as a market index. Some well-known benchmarks are the BSE Sensex and NSE Nifty.
Mutual fund that invests in blue chip stocks. Typically a growth fund.
A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.
A mutual fund whose portfolio consists primarily of corporate, municipal or government bonds. These funds generally emphasize income rather than growth.
A system of evaluating the probability of whether a bond issuer will default. Standard and Poor's Corp. and Moody's Investors Services, among other firms, analyze the financial stability of both corporate and government bond issuers. Ratings range from AAA or Aaa (extremely unlikely to default) to D (currently in default). Bonds rated BBB or below by S&P or Baa or below by Moody's are not considered to be of investment grade. Mutual funds generally restrict their bond purchases to issues of certain quality ratings, which are specified in their prospectuses.
The right to buy a fixed number of shares/bonds at a particular price in a specified period.
Profit that results when the price of a secuirty held by a mutual fund rises above its purchase price. If the security is sold, then the capital gain is realized; if the security is still being held, the gain is unrealized. If the security has been held for more than a year, the gain is long-term; otherwise it is shorter-term. A capital loss occurs when the price of a security falls below its purchase price.
Payments made usually at the end of the year to mutual fund shareholders of gains realized on the sale of securities in the mutual fund portfolio.
A rise in market value of a mutual fund's securities, reflected in its net asset value per share. This is a specific long-term objective of many mutual funds.
An interest-bearing, short-term debt instrument issued by banks and thrifts.
A mutual fund scheme in which the investors commit their money for a particular period.
This fund invests in fixed income instruments such as debentures (bonds), Treasury Bills etc. Preferred by investors who want steady income and not willing to take much of risk.
An individual or a corporation serving as principal underwriter of a mutual fund's shares, buying shares directly from the fund, and reselling them to other investors.
A basic risk management tool in which an investor maintains a mix of common stocks, bonds money markets and other investments to reduce potential risk.
In a dividend plan the fund pays dividend from time to time as and when the dividend is declared.
When an investor invests with the idea of exiting from the fund immediately after the dividend is paid.
Average duration provides a measure of a fund's interest-rate sensitivity � the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Duration also gives an indication of how a fund's NAV will change as interest rates change. A fund with a five-year duration would be expected to lose 5% from its NAV if interest rates rose by one percentage point or gain 5% if interest rates fell by one percentage point.
This is a scheme that invests only in equity.
The major portion of investment in ELSS is in equity. The dividends in this scheme are tax-free.
A feature offered by some mutual fund in which an investor is able to switch from one scheme to another within the fund family without having to pay any charges. Same as Switching.
Exchange Traded Fund is a security that tracks an index, a commodity or a sector like an index fund or a sectoral fund but trades like a stock on the exchange.
A mutual fund's operating expenses, expressed as a percentage of its average net assets. Mutual funds with lower expense ratios are able to distribute a higher percentage of their total returns to their shareholders.
An accounting period consisting of 12 consecutive months
A bond or other type of debt whose coupon rate changes with market conditions (short-term interest rates).
A mutual fund company offering many funds for various objectives.
The individual responsible for making portfolio decision for a mutual fund.
Gilts are securities issued by the central government and are said to carry sovereign or minimal risk.
A mutual fund investing in stocks or bonds through out the world.
A mutual fund whose primary investment objective is long-term growth of capital.
A strategy designed to reduce investment risk. Hedging techniques uses call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.
Length of time that an individual holds a security
This is a fund's most recently reported top securities (excluding cash and cash equivalents for all but short-term bond funds). The securities are ranked by the percentage of the portfolio's net assets they occupy. With this information, investors can more clearly identify what drives the fund's performance.
The fund inception date gives the date on which the fund commenced operations.
A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.
A fund that specializes in the purchase of securities that match or represent a specific index. For example, BSE 30 index is a fund that seeks to mimic the returns represented by the BSE Sensex.
The smallest investment amount accepted for establishing a new account. The minimum initial purchase notifies the investor of monetary restrictions for becoming a shareholder. Generally speaking, institutional funds have the highest minimum initial purchase amounts. For those investors with only a small amount to invest, checking the fund's minimum initial purchase should be one of the first criteria you use when selecting an appropriate mutual fund.
The monthly effective rate paid (or received if you are a creditor) on borrowed money. Expressed as a percentage of the sum borrowed.
Interest-rate sensitivity, measured by the average effective duration � the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Duration also gives an indication of how a fund's NAV will change as interest rates change. A fund with a five-year duration would be expected to lose 5% from its NAV if interest rates rose by one percentage point or gain 5% if interest rates fell by one percentage point.
A liquid fund is the same as a money market fund, but avoids a lock-in period.
Period during which an investor is restricted from selling a particular investment.
A mutual fund that invests in bonds that mature in more than 10 years.
A profit on the sale of a mutual fund share that has been held for more than one year.
A mutual fund that invests only in money markets such as commercial papers, commercial bills, and treasury bills certificate of deposit and other instruments specified by RBI. These funds have a minimum lock-in period of 15 days. Till recently, the RBI regulated money market funds but they now come under SEBI.
A Mutual Fund (MF) is a form of trust that pools the funds of a whole lot of investors to make more money by investing in an array of financial instruments.
NAV represents the value of a unit in the scheme and is the main performance indicator for a mutual fund.
The current market worth of a mutual fund share. Calculated daily by taking the funds total assets: securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of units outstanding.
This figure represents the fund's total asset base, net of fees and expenses.
Mutual fund schemes that continuously offer new units to the public are called open-ended schemes. They offer units for sale without specifying any duration for redemption.
Are the expenses that a company incurs for normal cause of business. Includes cost of raw material, wages, etc.
The right to buy or sell a security after a particular period and at a particular price and quantity. There are generally two kind of options, call option and a put option. A call option gives the right to the buyer of the option to force the writer of the option to sell a particular stock at a prefixed price within a particular period. A put option gives the buyer a right to force the writer to buy a particular stock at a prefixed price.
The date on which distributions are paid to shareholders who do not want to reinvest them. This date can be anywhere from one week to one month after the record date.
A professional hired by the mutual fund advisor to make investment decisions concerning the purchase and sale of securities for the mutual fund portfolio in accordance with the fund's objectives.
The rate at which the fund's portfolio securities are changed each year. If a fund's assets total 100 crore and the fund bought and sold 100 crore worth of securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative funds which invest for the long term. High portfolio turnover rates generally add to the expenses of a fund.
The amount by which a bond or stock sells above its par value.
The price/book (P/B) ratio of a fund is the weighted average of the price/book ratios of all the stocks in a fund's portfolio. Book value is the total assets of a company, less total liabilities (sometimes referred to as carrying value). A company's book value is calculated by dividing the market price of its outstanding stock by the company's book value, and then adjusting for the number of shares outstanding. (Stocks with negative book values are excluded from this calculation.)
Interest rate that commercial banks charge their credit worthy borrowers such as large corporations.
R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance.
The date the fund determines who its shareholders are; "shareholders of record" who will receive the fund's income dividend and/or net capital gains distribution. Frequently the business day immediately prior to the Ex-Dividend Date.
The price at which a mutual fund's shares are redeemed (bought back) by the fund. The redemption price is usually equal to the current net asset value per share. Also called the bid, call or sell price.
The date on which a share's dividend and/or capital gains will be reinvested (if requested) in additional fund shares.
The privilege some mutual funds give to their shareholders to use income or the capital gains to purchase additional shares of their fund without any sales charge.
The measure of an investor's ability to withstand volatility in the markets. Investors with a near-term focus are likely to be more conservative than those with a long-term viewpoint who can benefit from the market's fluctuations by taking advantage of compounding and historical growth of the markets.
An equity scheme that invests in shares of companies operating in specific sector or industries is called a sector fund. For instance, a pharma fund would invest only in pharmaceutical companies.
A mutual fund whose prospectus allows for more than one portfolio. Portfolios may be specialized (Sector Fund) or broad (growth stock, along with a money market portfolio). Management can create additional portfolios as it sees fit.
The Sharpe ratio, provided by Lipper, is based on a risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated using standard deviation and excess return to determine reward per unit of risk. First, the average monthly return of the 90-day Treasury bill (over a 36-month period) is subtracted from the fund's average monthly return. The difference in total return represents the fund's excess return beyond that of the 90-day Treasury bill, a risk-free investment. An arithmetic annualized excess return is then calculated by multiplying this monthly return by 12. To show a relationship between excess return and risk, this number is then divided by the standard deviation of the fund's annualized excess returns. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.
A mutual fund specializing in the securities of a particular industry or group of industries or special types of securities.
Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time, the total returns of any given fund are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund's total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund's returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund's volatility.
This indicates the smallest permissible additional purchase a fund will accept in an existing account.
The organization, usually a bank, that mutual funds employ to prepare and maintain records relating to shareholder accounts. Some mutual fund groups operate in-house transfer agencies.
A government security, sold through Reserve Bank of India for short-term loans, 91 days to 364 days.
A gauge of risk-adjusted performance calculated by dividing the excess return of a portfolio above the risk-free rate by its beta. Higher values are desirable and indicate greater return per unit of risk.
Just as shares represent the extent of equity ownership in a company, units represent your extent of ownership in a mutual fund.
An investor who invests money in mutual funds.
To sell the units of mutual fund.
A limited company formed to provide venture or risk capital to new industries.
A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price. This "warrant'' is then traded as a security, the price of which reflects the value of the underlying stock. Warrants are issued by corporations and often used as a ``sweetener'' bundled with another class of security to enhance the marketability of the latter.
The facility to periodically redeem mutual fund and have proceeds mailed directly to the investor.
Income or return received from an investment, usually expressed as a percentage of market price, over a designated period. For a mutual fund, yield is interest or dividend before any gain or loss in the price per share.
A graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the 2 or 5 year treasury with the 30 year.
Bond sold at a fraction of its face value. It appreciates gradually, but no periodic interest payments are made. Earnings accumulate until maturity, when the bond is redeemable at full face value. Nonetheless, interest is taxable as it accrues. As a result, zero coupon bonds are often used for IRAs, Keoghs and other tax-deferred retirement plans.