Drawbacks of Mutual Funds:

Inspite of all the advantage the MFs provide, there are still certain points the investor needs to keep in mind before taking the decision to invest.

· Management Risk

By investing in MFs, investors need to depend on the fund managers to make the right decisions regarding the fund's portfolio. If the manager does not perform well, then the investments may not generate as much returns as expected. Thus, investors lay at the discretion managers.

· Costs Involved

For an AMC, the main source of income is the entry and exit load which they charge from investors. Also, funds do normally change administrative fees to cover their day-to-day expenses.

· Dilution

As the funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return.

Advantages of Investing in Mutual Funds

Mutual funds provide a great deal of advantages as an investment avenue. They make saving and investing simple, accessible and affordable. MFs present an attractive investment option over direct equity. MFs provide an attractive and simple way of tapping the potential of various investment options like equity, debt and money market investments.

Fig. 1.12 Advantages of investing in Mutual Funds

Some of the advantages of investing in MFs are:

· Professional management

While a single individual may not be able to afford the advantages of a professional fund manager, it becomes one of the main advantages enjoyed by mutual fund investor who enjoy the services of experienced and professional fund managers who manage the portfolio of securities on a full time basis and decide which securities to be bought and sold based on extensive research.

· Diversification

Mutual Funds help provide diversification of investments which help to reduce the risk an investor by investing in single security. MFs provide diversification to an investment portfolio by holding a wide variety of securities. It provides the opportunity to invest in many markets and securities.

· Variety

With a variety of scheme available, investors can very specifically select the stock, bond or money-market funds they would like to invest in considering their investment objective and risk taking capacity. It offers different types of schemes to investors with different needs and risk appetites. Investors now have the opportunity to invest in many markets and securities. And also they can select funds based on their investment objective, i.e., whether they want regular income or capital appreciation or liquidity.

· Low Cost

MFs involve investments by a large number of investors because of which they are able to provide the benefits like diversification and professional management at a fraction of cost of making such investments independently. They involve buying and selling large amounts of securities at a time thus helping to reduce the transaction cots and bring down the average investment cost per unit, thereby helping in achieving economies of scale.

· Liquidity

Liquidity is the ability to readily access your money in an investment. MFs provide the benefits of liquidity as they have the ability to get in and out with relative ease. Investors are able to sell their MFs in a relatively short period of time without there being much difference between sale price and market price.

· Simple

Investment in MFs is considered to be simple as compared to other available instruments in the market. The minimum investment is also considered to be affordable.

· Tax Benefits

MFs also seem to be an attractive investment avenue to many because of the tax benefits they provide. Dividends declared by MFs are tax free in the hands of investor.

Benefits of Mutual Funds

· Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive.

· Diversification It simply means that one must spread their investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of returns.

· Variety Mutual funds offer a tremendous variety of schemes. It offers different types of schemes to investors with different needs and risk appetites and it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity.

· Professional Management When one person buys in to a mutual fund, they are handing their money to an investment professional that has experience in making investment decisions.

· Regulations Securities Exchange Board of India (“SEBI”), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors.

· Liquidity In open-ended mutual funds, one can redeem all or part of their units any time they wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period.

· Convenience An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic

investment Plan or a Systematic Withdrawal Advantage Plan.

· Flexibility Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time.

· Transparency Open-ended mutual funds disclose their Net Asset Value (“NAV”) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.

History of Mutual Fund Industry in India

The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) were Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 billion in March 1993 and till April 2004; it reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit

Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92), LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

Technical Aspects

Technical Aspects

With the plethora of schemes to choose from, the retail investor faces problem in selecting funds. Worldwide, good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow there must be some performance indicator that will reveal the quality of selection of various AMCs.

While searching and selecting the mutual funds, the investor should also take into account both the quantitative and qualitative aspects, although the qualitative side is important, an investment consultant will ultimately use same quantitative measure such as ratio, statistics or risk adjusted measure of performance to validate the qualitative component of search and selection.

Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone cannot be indicator of future performance, it is, frankly, the only quantitative tool to adjudge how good a fund is at present.

However, return alone cannot serve as the sole criteria of being the measurement of performance of a mutual fund scheme; it is equally important to consider the risk taken by fund manager to measure whether the risk taken have paid off adequately or not.

Risks associated with a fund:

The risks associated with a fund could be defined based on the fluctuations of the returns generated by it. The higher the fluctuations in returns, in a given period, the higher the risks associated with it. These fluctuations are results of two forces:

i. General market fluctuations, which affects all the stocks in the market. This can be called as market risk or systematic risk.

ii. Risks associated with the stocks in the portfolio of a fund. This is called unsystematic risk.

A fund manager could reduce the unsystematic risk by diversifying the investments. Systematic risks, on the other hand, cannot be reduced and is dependent on the macro economic factors.

Sharpe Ratio

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

A variation of the Sharpe ratio is the Sortino Ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility.

It is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio is calculated as follows:

Sharpe Ratio=

The ratio is subject to certain limitations. It does not serve as an absolute measure but relatively does well. It gives no meaningful information on its own, but it is useful to rank and compare MFs that are being evaluated for investment.

Measures of Risk-Return

Since risk is inherent to the investment process, mutual fund investors must be adequately and consistently rewarded for the risks they assume. Prudent research means searching for fund managers who consistently produce returns justifying the risks they have taken. This can be justified with the help of Risk- Return Ratio.

The Risk- Return Ratio is a measure of the relation between the risks inherent in a position compared to its potential gain. It is a key factor which helps in deciding where an investor should invest by estimating which funds provide greatest amount of return with the least amount of risk.

The idea is to measure the rate of return achieved by a fund relative to the amount of risk taken en-route. By using this risk-return relationship, we try to compare the comparative strength of the mutual fund in a better way.

This project therefore attempts to study a few statistics which makes it possible to more precisely quantify the relationship between risk and return. These measurements help determine:

Ø A funds volatility (Standard Deviation)

Ø How closely a fund mirrors a particular market index (R²)

Ø How volatile a fund is compared with that market index (Beta)

Ø How much of funds risk- adjusted return is created by a talented manager (Alpha)

Ø Excess return for each unit of risk taken by the fund (Sharpe Ratio)

Ø Excess returns a fund generates for each unit of market risk it takes (Treynor Ratio)

Ø Skill of fund manager (Information Ratio)

Ø Added value that depends on the relative risks of the funds (M²)

Ø Excess return per unit of risk based on downside semi-variance (Sortino Ratio)

Cost of Investing

The most common parameter for investors to evaluate their mutual fund investments is "returns". However, the other important aspect to be taken into consideration is the costs involved in investing in mutual funds. Investing in MFs involves bearing of certain costs on the investor's part, which in turn, have an impact on the ruturns clocked by the investor. They are one of the reasons, why some good performing funds also end up with sub-par performance.

The costs that can be associated with MFs are:

· Loads

Load is the price paid over and above the fund's NAV at the time of buying or selling of units. MFs mainly charge loads because of two reasons – to meet their expenses and to discourage investors from exiting. Loads are of two kinds.

Ø Entry –Load

This is the amount paid at the time of purchase of the fund. Entry loads are mainly charged to meet the expenses of entering the markets and also to keep away the speculators and short term players. In case of entry load, the sale price of the fund can be calculated as:

Sale price = Applicable NAV _* (1+ entry load)

Ø Exit Load

This is the amount at the time of sale of the fund. Exit-load is mainly levied to discourage early withdrawals; as too many early withdrawals can sometimes put redemption pressure on the funds. In case of an exit-load, the repurchase price of the fund can be calculated as:

Repurchase price = Applicable NAV _* (1- entry load)

· Marketing Fees

Some funds deduct the costs of advertising and marketing the fund directly from the fund's assets rather than absorbing them in the management costs. A portion of that fee may also be paid to the broker who sold the fund. It is the cost associated with the advertising, marketing and distribution of the fund.

· Management Fees

All funds, irrespective of being a load fund or a no-load fund, must charge a management fee to compensate the portfolio, managers for their services, pay brokerage commissions on portfolio transactions, and so forth.

The best tool of measuring the amount that the investor has to bear as expenses with respect to the returns he earn on his investments is the Expense Ratio.

Measures of performance of Mutual Fund

A prudent investor would be interested in measuring the performance of his investments on a time to time basis. However, the method he selects to do so can have an impact have an impact on them. For this, the investor need to be very careful of the approach he adopts to measure the performance of his investments.

For measuring simple returns, the following methods can form a basis:

· NAV

NAV or the net asset value is generally defined as the fund's total assets divided by the number of shares outstanding. It is the total market value of the securities divided by the total number of units of the scheme. Though, it is most widely used method by the investors to measure the returns on their investments, it can be misleading

Relying on changes in NAV can understate the actual returns because NAV doesn't tell whether the fund has paid any dividend or distributed any capital gains over the period being measured. Moreover, a capital gains payment would actually reduce the NAV because the fund pays out money from what is counted as the part of the value of its portfolio.

· Total Returns

Total returns can be counted as one of the best measures as it denotes the total return generated by the initial investment for the time the money is invested in the fund. It includes share appreciation as well as dividends, interest and capital gains distributions from the securities the fund sell at profit. Thus, it includes dividend and capital gains distributions along with any changes in the fund's share price.

In other words, total returns, expressed as a percentage of an initial investment in a fund, represents the change in that investment's value over a given period, assuming any distributions were reinvested in the fund.

· Yield

Yield is the measure of net income earned by the securities in the fund's portfolio during a specified period. It is expressed as a percentage of the fund's NAV. Yield does not include any change in the investment's value over a given period.

Fixing on yield can also be misleading. Yields express dividends or interest as a percentage of the price but do not reflect how the shares themselves may have risen or fallen in value.

Glossary of Mutual Funds

A Adviser Also known as "investment adviser" this is the organization that serves as money manager for a mutual fund. The adviser is paid a fee based on the percentage of assets under management.

Annuitization A plan for taking a periodic distribution of money during an annuity’s payout period.

Annuity A series of periodic payments for a stipulated time frame.

Asked price The price at which a security is offered for sale by a dealer. For a mutual fund, the asked or offering price equals the net asset value (NAV) plus any front-end load.

Asset Allocation A systematic approach for dividing the portfolio into stocks, bonds and cash, including appropriate sub-categories. Factors such as age, investment horizon, risk tolerance, and portfolio size determine an individual's asset allocation. This strategy is designed to minimise the danger of asset-class risk.

Asset Management Company (AMC) A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced.

Automatic reinvestment A service available from virtually all funds, whereby your dividend and capital gains distributions can be reinvested into full and fractional shares at the prevailing NAV. A reinvestment program might offer several options.

Asset management fee The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.

B Balanced fund A hybrid portfolio of stocks and bonds.

Bid price The current price a dealer is willing to pay for a security. For a mutual fund the bid is usually called the redemption charge. See asked price and dealer.

Blue-chip stock The stock of a large, well-established, high quality company.

Bond A debt instrument that promises to pay interest (or coupon) payments and a fixed amount of principal at maturity. See zero-coupon bond.

C Cash flow of a fund Net, new unit holder’s money going into a fund. Some observers feel that portfolio enjoying consistent cash inflows have a performance edge.

Cheque-writing privilege A service enabling investors to write cheques against their mutual fund account balances. Cheques usually must meet a certain minimum amount and the service is restricted to money-market funds.

Closed-end fund Unlike open-end funds, closed-end funds neither issue nor redeem fresh units to investors. Some closed-ended funds can be bought or sold over the stock exchange if the fund is listed, in which case the fund functions like any other stock. Else, investors have to wait till the redemption date to exit from the fund. Most listed closed-ended funds trade at discount to the NAV.

Commercial paper A staple of money-market instruments, short-term in nature, issued by large, creditworthy corporations.

Company risk The danger that some misfortune-such as a lawsuit, poor earnings, or the loss of a key market will befall a company.

Compounding Earnings on an investment's reinvested earnings. Given sufficient time, compounding can result in exponential growth of money.

Contingent deferred sales charge (or CDSC) A back-end load imposed on an investor if he exits from the fund before a pre-determined period (say 6 months). The charges decline the longer an investor stays invested with a fund.

Country risk The danger international investors face that a nation will suffer severe economic or political problems, or even a natural disaster. This peril is greatest with a single-country fund that invests in a smaller emerging economy.

Credit risk The danger that the issuer of a corporate or municipal bond will experience financial difficulties causing deterioration in credit worthiness, perhaps even a default. Treasury securities are considered free of this risk.

Currency risk The risk, faced by investors in foreign bond and stock funds, that the foreign currency (say, the US dollar) will appreciate relative to the currencies in which the securities are denominated. When that happens, the funds will realize a currency loss.

Custodian The independent organization, often a bank that is responsible for the handling and safekeeping of a fund’s cash and securities.

D Daily dividend fund A fund (money-market or bond) that calculates dividends daily, paying out or reinvesting the same.

Derivatives Financial instruments based on some primary underlying asset or index such as a stock, bond, commodity, or a benchmark of stock prices. Derivative securities fluctuate up and down in tandem with the primary security. Derivatives often are leveraged, making them more volatile. They can be used to speculate as well as to reduce or control an unwanted risk. Options and futures are standardized derivatives. Others are customized to meet specific needs.

Discount Refers to a closed-end fund trading in the market at a price below the NAV of its portfolio.

Distributor The organization that supplies mutual fund products to investors. The distributor may sell units to securities dealers, who then sell them to investors, or it might deal directly with the public.

Diversification The strategy of spreading money among different securities to reduce or eliminate company or asset-class risk.

Dividend yield The indicated annual dividend divided by the current price of an investment.

E Exit load (Back-end load) A sales charge paid when an investor sells a fund. See contingent deferred sales charge and redemption fee.

Emerging-markets fund A fund that targets companies trading on stock exchanges in a variety of developing nations including those in Southeast Asia, Eastern Europe, and Latin America.

Entry load (Front-end load) A sales fee charged at the time of purchase of mutual fund units. See Exit load.

Equity A synonym for stock, the term refers to an ownership interest in a corporation.

Equity-income fund A fund that focuses on stocks with high-dividend yields, such as utilities, real-estate, securities, and financial companies.

Ex-dividend date Normally, one business day after the "record date". Investors purchasing unit on or after the "ex-dividend" date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.

Expense ratio The annual expenses of a fund (at the end of the financial year), including the management fee, administrative costs, divided by the number of units on that day.

F Fund house/family A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.

Fee table Normally mentioned in the prospectus explaining in detail the various kinds of fees charged to the unit holder and the impact of these charges over time.

Fixed annuity A contract that generates guaranteed returns during its accumulation period and level payments during its payout period.

Flexible-bond fund A fund that can invest in a variety of bonds and alter the mix. The manager does not face restrictions on quality or maturity.

Foreign-bond fund A fund that invests in government and corporate debt denominated in non-U.S. currencies.

401(k) plan A popular contribution program, available through many employers. Within these tax-sheltered plans, participants often can choose mutual funds as one or more of the investment choices.

Funds of funds These are all-in-one funds that invest in other mutual funds.

Futures (or futures contract) An exchange-traded contract calling for settlement on a specific asset (such as the S&P 500) at a predetermined price and time. Fund managers may hedge with futures.

G Global fund A fund that invests in companies headquartered or traded in a variety of countries, including the United States.

Growth/Equity fund A fund holding stocks with good or improving profit prospects. The primary emphasis is on appreciation.

Growth investing A popular investment style whereby fund managers identify companies showing promise of above-average earnings. Stocks are held primarily for price appreciation as opposed to dividend income. Growth investors often are willing to pay high multiples of earnings or book value for companies with exciting prospects.

H Hedging A general term used to describe any of several risk-reduction strategies. A fund manager might partially hedge against a market decline simply by moving a larger fraction of the portfolio into cash. Alternatively, the manager could sell stock-index futures contracts. If the market falls, the gains on the shorted futures would more or less offset the decline in the portfolio's value.

High-yield bond Issues rated below investment grade (as evaluated by credit rating agencies). Although they often promise high income, junk bonds carry high credit risk and might be near or in default. Also known as high-yield bonds, junk securities are particularly sensitive to changes in economic conditions. See Junk bond.

Hybrid fund A fund that holds both stocks and bonds. Also known as Balanced funds.

I Income (Dividends) Payments to unit holders made from the dividends, and interest earned on the securities held by a fund. Bond funds pay dividends more frequently than growth funds. Income distributed through dividends is distinct from returns which is the capital appreciation on investment.

Index Fund A fund that replicates a particular market index such as the BSE Sensex/CNX Nifty by holding many if not all of the same stocks and in the same proportion as in the benchmark index. With low-cost, passively managed index funds, you're assured of doing about as well as the benchmark index.

Inflation risk The danger that the returns from one's investments will fail to keep pace with increase in the general price level. This is a major problem with secure investments such as Treasury bills, while stocks offset this risk to a large extent.

Initial public offering (IPO) The sale of a company's shares or a mutual fund’s scheme to investors for the first time.

Interest-rate risk The danger that the price of a bond will fall as interest rates rise. Portfolio managers gauge a fund's interest-rate risk by calculating its duration.

J Junk Bond Issues rated below investment grade (as evaluated by credit rating agencies). Although they often promise high income, junk bonds carry high credit risk and might be near or in default. Also, known as high-yield bonds, junk securities are particularly sensitive to changes in economic conditions. See High-Yield bond.

L Liquidity The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no adverse price impact.

Liquidity risk A danger faced by the holder of thinly traded or illiquid securities who are forced to sell a relatively large number of shares in a short period, often at an unfavorable rate. Junk bonds, small stocks and stocks traded in thin foreign markets carry this risk.

M Market risk The danger that overall stock markets could fall. Fund managers may try to deal with this risk by moving a larger percent of their portfolios into cash or by hedging with futures and options. However, market risk is not a one-way street; it's also the peril of being on the sidelines when the stock prices surge.

Money-market fund A fund that invests in short-term debt securities such as Treasury bills and Commercial paper. As the safest of all funds, these portfolios have a stable NAV.

Mutual fund By far the most popular type of investment company. A diversified and professionally managed fund, the mutual fund stands issues fresh units to incoming investors at NAV plus any applicable sales charge, and it redeems shares at NAV from sellers, less any redemption fee.

N Net asset value (NAV) The price or value of one unit of a fund. It is calculated by summing the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding. Most open-ended funds companies compute NAVs once a day based on closing market prices.

Net assets The total value of a fund's cash and securities less its liabilities or obligations.

No-load fund A fund with no front-end or back-end load.

Nominal return The stated, contractual rate of interest on a fixed-income security. The total return on an investment ignoring inflation.

P Payable date The date when unit holders will receive dividends assuming they have elected not to reinvest those payments in additional units. The payable date follows the “record date” by anywhere from a few days to several weeks.

Portfolio A group of securities in a common account. The term is used as a synonym for fund.

Portfolio rebalancing The process of periodically revising a portfolio to restore the asset-class weights for stocks, bonds, and cash to their long-run target values. You do this by selling shares in appreciated asset classes and buying shares in under-represented categories.

Portfolio turnover A measure of the amount of buying and selling activity in a fund. Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.

Premium Refers to a closed-end fund trading at a price above NAV. Refers to a bond priced above its par (or face) value.

Prospectus/Letter of offer A type of owner's manual for unit holders. The prospectus provides essential information about a fund's investment policies, objectives, risks and services, and information on management fees and important financial data including past performance.

Put option A contract granting the buyer the right to sell a specific asset, such as a stock, at a fixed price during a limited time.

R Real return The amount by which a security's nominal return exceeds inflation. If inflation turns out to be much higher than investors had predicted, the real return can be negative. Obviously, the higher your real return, the better.

Record date The date on which a fund determines its “unit holders of record” who are entitled to an impending dividend or bonus units. The record date is normally the business day prior to the ex-dividend or ex-bonus date.

Redemption price The price you receive when you sell fund units. It equals NAV less any back-end load (contingent deferred sales charge or redemption fee).

Reinvestment date The date on which a dividend or bonus units will be reinvested in additional full and fractional fund shares. This is normally on the business day following the record date.

S Sector fund Any of various funds that invest exclusively in a specific industry or stock group.

Sector risk The danger that a particular industry such as software/biotechnology will plunge.

Specialty fund Funds that pursue a narrow and sometimes unusual investment orientation. Examples include funds that avoid certain objectionable types of companies or industries such as tobacco and environment-unfriendly companies. Specialty funds are not common in India.

Stock A security that represents an equity or ownership interest in a corporation. Changes in a firm's earnings and financial condition have a major effect on its stock price. A portion of the firm's profits may be paid as dividends to shareholders.

Style An investment philosophy or approach pursued by a fund manager as seen by the types of stocks held, such as large-cap value or small-cap growth companies.

Systematic Investment Plan (SIP)/Periodic Investment Plan (PIP) A service enabling you to have a designated sum of money transferred regularly from your bank account or pay-check to the fund account. SIP enables an investor to benefit from compounding. (See Compounding)

T Total return The most complete measure of investment performance. Total return considers the price increase or decrease of an asset, along with its income or yield.

Transfer agent The organization, usually a bank or trust company, that handles sales and redemptions, of fund shares, maintains shareholder records, computes the fund's NAV each day, and pays dividend and capital-gains distributions. Some fund families perform the transfer agent functions for themselves.

Treasury securities Debt obligations of the union government. The government issues Treasury bills and other paper with maturities ranging from 1 year to 10 years. These securities are considered to be free of default risk but may carry interest-rate risk.

V Value investing A popular investment style that focuses on identifying under-priced securities. In contrast to growth investors, value investors try to buy stocks selling for low multiples of earnings, book value, or any other yardstick.

W Withdrawal plan A service offered by many mutual funds that allows you to receive cheques from the fund account on a regular basis.

Y Yield The income (dividend/interest) received from an investment, generally over the past 12 months, expressed as a percentage of its current price.

Yield Curve The relationship at a given point in time between yields on fixed-income securities with varying maturities-commonly, Treasury bills, notes and bonds. The curve typically slopes upward because longer maturities normally have higher yields, although it can be flat or even "inverted" or downward sloping.

Yield to maturity The compounded annual total return expected on a bond investment if it is held to maturity and the issuer makes all promised payments on time and in full. To realize this return, you must be able to reinvest each interest payment at a rate equal to the yield to maturity.

Z Zero-coupon bond A bond that makes no periodic interest payments. The final maturity payment includes accrued interest as well as principal. Zero-coupon bonds are sold at a discount to their maturity values.