Mutual Fund Glossary

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About Mutual Funds

Glossary
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Investment Options A B C D E F G I J K L M N O P R S T U V Y Z
Why Mutual Funds?
Taxation Information
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SEBI Investor Education
Programme Amortization
Glossary The systematic repayment (e.g., monthly, quarterly, or yearly) of a debt or loan, such as a bond or mortgage,
Links to Useful Sites over a specific time period.
---Select Fund--- GO Annual Report

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The corporate financial statement that shareholders eagerly receive each year. It includes financials of the
Scheme Name
company’s performance over the previous year.
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Annual Return
The percentage of change in a mutual fund’s net asset value over a year, after factoring in dividend receipts,
capital gains, and reinvestment of these distributions.
ArbitrageThe simultaneous purchase and selling of a security in order to profit from a differential in the price.
This usually takes place on different exchanges or marketplaces.
Asset
Anything that has monetary value. Typical personal assets include stocks, real estate, jewelry, art, cars, and
bank accounts. Corporate assets are found on the company's balance sheet and include cash, accounts
receivable, short- and long-term investments, inventories, and prepaid expenses.
Asset Allocation
Dividing investment dollars among various asset classes, typically among cash investments, bonds, and
stocks.
Asset Classes
The three major asset classes are cash, bonds, and stocks.
Average Maturity
The average of all maturity dates for securities in a money market or bond fund. The longer the average
maturity, the more volatile a fund's share price will be, moving up or down as interest rates change.
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Balanced Funds
Funds that invest in both stocks and bonds. The relative weightage may differ with fund manager.
Balance Sheet
A company's financial statement that reports its assets, liabilities, and net worth at a specific time.
Basis Point
Most often used relating to changes in interest rates. One basis point is 1/100 of a percentage point,
therefore 100 basis points make 1 %.
Bear Market
When the overall market loses value over an extended period of time. There is no "official" definition of what
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makes a bear market.
Benchmark
A standard to which the performance of something can be compared.
Beta
A measure of the relative volatility of a stock or other security as compared to the volatility of the entire
market. A beta above 1.0 shows greater volatility than the overall market, and a beta below 1.0 is less
volatile.
Blue-Chip Stocks
Really good, large companies that have been around long enough to have a solid history of rewarding
shareholders. Think Hindustan Lever Ltd.
Bond
A debt instrument issued by a company, state or the central government (or its agencies), with a promise to
pay interest at regular intervals and return the principal on a specified date.
Bond Rating
An evaluation of the possibility of default by a bond issuer, based on an analysis of the issuer's financial
condition and profit potential. Bond rating services are provided by, among others, CRISIL and Fitch.
Book Value
A company's assets, minus any liabilities and intangible assets. Book value is literally the value of a
company that can be found in the accounting ledger and is often represented as a per-share value by taking
the company's shareholder equity and dividing by the current number of shares outstanding.
Broker
One who sells financial products. Whether in insurance, real estate, stocks, or mutual funds.
Bull Market
A market that has been gaining value over a prolonged period.
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Capital
The amount of money invested by an investor.
Capital Appreciation
One of the two components of total return, capital appreciation is how much the underlying value of a
security has increased. If you bought a stock at Rs.10 per share and it has risen to Rs.13, you have enjoyed
a 30% return or appreciation on the original capital you invested. Dividend yield is the other component of
total return.
Capital Gain/Loss
The difference between the price at which an asset is sold and its original purchase price (or "basis").
Cash Flow
A measure that tells an investor whether a company is actually bringing cash in to the company's coffers.
Certificate Of Deposit (CD)

An insured, interest-bearing deposit at a bank, requiring the depositor to keep the money invested for a
specific length of time.
Closed-End Fund
A mutual fund that has a fixed number of shares and is typically listed on a major stock exchange. These
funds often trade perpetually at a discount to their net asset value (NAV).
Commercial Paper
A promissory note issued by a large company to secure short-term financing.
Commission
A fee charged by a broker for executing a securities transaction.
Compounding
When an investment generates earnings on reinvested earnings.
Consumer Price Index (CPI)

An inflation tracker, much followed by the mainstream media. It is the measure of the price change in
consumer goods and services.
Coupon/Coupon Rate
The interest rate that a bond issuer is obligated to pay the bond holder until the bond matures.
Cyclical Stock
Stock of a company whose performance is generally related (or thought to be related) to the performance of
the economy as a whole. Paper, steel, and the automotive stocks are thought to be cyclical because their
earnings tend to be hurt when the economy slows and are strong when the economy turns up. Food and
drug stocks, on the other hand, are not considered "cyclicals," as consumers pretty much need to eat and
care for their health regardless of the performance of the economy.
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Debenture
A debt obligation that is not backed by collateral, but usually rated by a credit rating agency.
Derivative
A financial contract whose value is "derived" from an another underlying asset, such as stocks, bonds,
commodities, or a market index such as NSE 50. The most common types of derivatives are options,
futures, and mortgage-backed securities.
Discount
The difference between the lower price paid for a security and the security's face amount at issue.
Diversification
Investing in separate asset classes (stocks, bonds, cash) and/or stocks of different companies in an attempt
to lower overall investment risk.
Dividends
Realized profits that a mutual fund distributes to unitholders.
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Earnings Per Share (EPS)

A company's earnings, also known as net income or net profit, divided by the number of shares outstanding.
Equities
Shares of stock in a company. Because they represent a proportional share in the business, they are
"equitable claims" on the business itself.
Ex-Dividend Date
The date during the quarter by which you must own a stock to receive its quarterly dividend payout. The term
"ex" means out or without in Latin. So, on the ex-date, you buy the stock without the dividend. Obviously, the
company needs some time to get its records straight; it cannot pay the dividend to someone who buys the
stock the morning the checks go out.
Expense Ratio
The percentage of a mutual fund that is taken out of the pockets of shareholders to pay. If you are investing
in mutual funds, look for funds with a low expense ratio.
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Fiscal Year
A 12-month accounting period. From April 1st to March 31st.
Floating Rate Bond

A bond with a variable interest rate. Adjustments to the interest rate are usually made every 6 months and
are tied to a certain money-market index. Example MIBOR.
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Gilt Funds
Funds that invest in government securities, which may be short or long-term in nature. Higher the maturity of
the portfolio, greater will be the volatility when interest rates change.
Growth Funds
Funds which invest a majority of their corpus in equity.
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Income Fund
A mutual fund that invests in bonds with higher-than-average dividends.
Index Fund
A passively managed mutual fund that seeks to match the performance of a particular market index. Partially
due to lower expenses, index funds outperform the majority of actively managed mutual funds.
Inflation
A rise in the prices of goods and services.
Initial Public Offering (IPO)

A company's first offering of common stock to the public.
Institution Investors
Institutions investors include pension funds, insurance funds, mutual funds, and hedge funds.
Investment Adviser
An entity that makes the recommendations and/or decisions regarding a portfolio's investments. Alternatively
called a portfolio manager.
Issued Share Capital

The portion of a corporation's equity obtained from issuing shares in return for cash or other considerations.
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KYC
Know Your Client. With effect from 1st Feb 2008, KYC compliance is mandatory for investments of Rs.
50,000 and above.
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L
Liabilities
Outstanding debts.
LIBOR (London Interbank Offer Rate)

This is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London
interbank market.
Liquidity
A measure of how quickly a stock can be sold at a fair price and converted to cash. Illiquid stocks are stocks
that don't trade in high volume. Thus, having too many shares of a stock that doesn't trade frequently would
make for a position that cannot necessarily be sold.
Load
A sales commission paid when purchasing shares of a mutual fund (called a front-end load) or when
redeeming shares of a mutual fund (called a back-end load).
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Management Fee
The money paid to the manager(s) of a mutual fund, annuity subaccount, or other type of professionally
managed investment. Also called an advisory fee.
Maturity/Maturity Date
The date on which the issuer of a certificate of deposit or a bond agrees to repay the principal to the buyer.
MIBOR (Mumbai Interbank Offer Rate)

This is the rate of interest at which banks borrow funds from other banks, in marketable size, in the Mumbai
interbank market.
Money Market Fund

Mutual fund that invests typically in short-term government instruments (treasury bills) and commercial paper
(CPs) and Certificates of Deposit (CDs). These funds tend to be lower-yielding, but less risky than most
other types of funds.
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Net Asset Value

The worth, in market terms, for each unit of the fund. It is calculated as the market value of all investments in
the fund less liabilities and expenses divided by the outstanding number of units in the fund. Most schemes
announce their NAVs on a daily basis.
Net Worth
The amount by which a person's assets exceed their liabilities.
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Open-End Fund
A mutual fund that has an unlimited number of shares available for purchase. Most mutual funds are open-
ended.
Operating Expenses
The cost of doing business. Operating expenses are deducted from revenues, and the result is, hopefully,
profits.
Option
A call option is a contract in which a seller gives a buyer the right, but not the obligation, to buy the optioned
shares of a company at a set price (the strike price) for a certain period of time. If the stock fails to exceed
the strike price before the expiration date, the option expires worthless. A put option is a contract that gives
the buyer the right, but not the obligation, to sell the stock underlying the contract at a predetermined price
(the strike price). The seller (or writer) of the put option is obligated to buy the stock at the strike price.
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PAN
Permanent Account Number. With effect 1st Jan 2008, quoting of valid PAN is mandatory for all
investments.
Portfolio
All the securities held by an individual, institution, or mutual fund.
Preferred Stock
Preferred stock pays a dividend on a regular schedule and is given preference over common stock in regard
to the payment of dividends or -- heaven forbid -- any liquidation of the company. Their share prices tend to
remain stable, and will generally not carry the voting rights that common stock does.
Premium
The difference between the higher price paid for a security and the security's face amount at issue.
Price-To-Earnings Ratio (P/E)

The share price of a stock, divided by its per-share earnings over the past year.
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Rate of Return
The difference between the price paid for a security and the security's sale price including any cash
distribution expressed as a percentage.
Record Date
The date on which a company's books are closed in order to identify share owners and distribute quarterly
dividends, proxies, or other financial documentation.
Risk Tolerance
The measurement of an investor's willingness to suffer a decline (or repeated declines) in the value of
investments while waiting and hoping for them to increase in value. Generally investors are risk averse.
Rupee Cost Averaging

Strategy of making regular investments into a mutual fund and having earnings automatically reinvested.
This way, when the share price drops, more shares are bought at lower prices.
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Sector Fund
A mutual fund that invests its shareholders' money in a relatively narrow market sector, e.g., technology,
energy, the Internet, or banking.
Securities
A fancy name for shares of stock, bonds, or any kind of financial asset that can be traded.
Spread
The difference between the bid and ask price, i.e., the highest price offered and the lowest priced asked for a
security.
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Time Value Of Money (TVM)

The basic principle that money can earn interest, and so something that is worth Rs. 1 today will be worth
more in the future if invested. This is also referred to as future value
Total Return
The rate of return on an investment, including reinvestment of distributions.
Tracking Error
A divergence between the price behavior of a position or portfolio and the price behavior of a benchmark.
Trustee
An individual who holds or manages assets for the benefit of another.
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Underwriter
A brokerage firm that helps a company come public in an initial public offering. The firm underwrites
(vouches for) the stock. When a company has been brought public, the shares have been underwritten.
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Volatility
The degree of movement in the price of a stock or other security.
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Yield
Interest or market earnings on a bond or a fixed-income instrument.
Yield Curve
A line plotted on a graph that depicts the yields of bonds of varying maturities, from short-term to long-term.
The line, or "curve," shows the relationship between short- and long-term interest rates.
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Zero-Coupon Bond
These bonds are so named because the coupon rate (the amount of interest paid) is zero. Rather than
paying interest on a periodic basis, these bonds are issued at a fraction of their par value and increase in
value as they approach maturity (e.g., U.S. savings bonds). Also known as an accrual bond.
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Know Your Client compliance is compulsory for all investments of Rs. 50,000 and above
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Mutual Fund Glossary

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HDFC Mutual Fund > Knowledge Center Page 1 of 8

Home / Knowledge Center / Glossary

About Mutual Funds

---Select Fund--- GO Annual Report

Certificate Of Deposit (CD)

Consumer Price Index (CPI)

Earnings Per Share (EPS)

Floating Rate Bond

Initial Public Offering (IPO)

Issued Share Capital

LIBOR (London Interbank Offer Rate)

MIBOR (Mumbai Interbank Offer Rate)

Money Market Fund

Net Asset Value

All the securities held by an individual, institution, or mutual fund.

Price-To-Earnings Ratio (P/E)

Rupee Cost Averaging

Time Value Of Money (TVM)

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