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Investing in Mutual Funds: Mutual fund Terms

First things first, let's go through a few of the terms that you would no doubt come across during your search for the perfect mutual fund.

We know its a little dry, but do try to read it through at least once, so you at least have an impression of these terms when you come across them.

Annualised Rate of return

The return achieved over a period of time expressed as an annual compounded interest rate. Used more to measure performance over long periods.

Asset Allocation

The distribution of a portfolio among different types of investments instruments, for instance equities, bonds, commodities, derivatives and money market instruments. Asset allocation of an investor varies based on the financial objectives, risk appetite, etc.

Bear Market

When the market environment suffers from a general downward fall in prices. "Bear" because the animal tends to drag down its prey.


An index that a mutual fund scheme measures its performance against. Those funds that outperform the index are generally considered to be doing well and vice versa.

Blue Chip

An established company with a long record of profitability. Usually has a large market capitalization and is fundamentally sound.

Bull market

When the market environment experiences an upward rise in prices. "Bull" because the animal tends to throw its prey upwards.

Capital Appreciation

The increase in the market value of investment. This is the main objective of most equity-based funds.


Compounding is the concept where interest or other amounts already received on the principal amount earn further interest or other payments.

Derivative instrument

A contract instrument whose price is affected by the price of an underlying security. This would include instruments like futures, warrants, options and convertible bonds.

Emerging Markets

Markets of economies which are at an early stage of development.  The prominent ones today are India, China, Brazil and Russia.


The part of a company's capital which is owned by its shareholders, commonly known as 'shares'. Equity funds invest in a broad portfolio of shares.

Entry Load

A percentage of your investment amount is deducted as a charge at the time of purchasing a fund – this is entry load. In India, this is typically 2.25% of your investment.

Exit Load

The proportion of your money which is taken from your investment when you redeem your mutual fund units. In India, the exit load varies for the amount being redeemed and the period you have been invested with the fund.


How deeply involved is the investor in a particular theme or trend. This is generally measured as the percentage of the portfolio that is invested in one theme, sector or trend.

Fully Invested

This refers to the situation when the fund has all its cash invested in market instruments. Usually, fund managers retain some cash balance for redemption purposes.


A statistical representation of the price of a basket of securities representing a market, a group of markets or a particular sector of a market. For example, BSE SENSEX, NSE Nifty. Indices are an indication of the general movement of a market.

Index Fund

A mutual fund which is invested in the exact same stocks (but may be in different proportions) as a particular Index. An index fund usually charges very low fees, and is considered to be a passively managed fund.

Management Fee

The fee charged by a fund house for managing the portfolio of the mutual fund. Usually expressed as an annual amount, but accrued each time the mutual fund is valued.

Mutual Fund

A large portfolio of securities managed by a professional fund manager. This portfolio is spilt into smaller units which can be purchased by individuals.

Net Asset Value (NAV)

This is the total value of all the assets (stocks, bonds, etc.) minus all the expenses (management fees, advertising) in a mutual fund. It is expressed as a per unit figure. It is the price at which one can buy or sell units of the mutual funds. The NAV does not include entry and exit loads.


A collection of individual investments. In a mutual fund, the group of securities held is a portfolio.

Prospectus / Offer Document

The public document that gives you all the information that you should know about a particular mutual fund. It is a binding document that the mutual fund purchaser promises to have read before he signs the application form.


The selling of mutual funds back to the fund house.

Riskless Asset

Usually taken to mean U.S. Treasury bills and bonds. The return on a riskless asset should be the lowest acceptable return on an investment. In India, the yield of the 10 year Government of India debt security is used as a proxy to Riskless Asset.

Rupee Cost Averaging

A fixed amount invested into a fund at predetermined times such that the investor purchases more units when the price is low and less when it is high. The idea is that the overall cost is lower if units are purchased over time, than if a lump sum of money was invested at one time.


Sectors refer to the industry in which a particular instrument invests. For example, shares of a company like Infosys would belong to the “Technology” sector. A mutual fund's portfolio is usually categorized into the sectors that it invests in, e.g., telecommunications, technology, infrastructure, etc.

Underlying Market

The market that a mutual fund is allowed to invest in. For example, The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) would be the underlying markets for most Indian mutual funds.


A measure of how much the price of an asset fluctuates over short periods.

Next : Risk classification