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Mutual Funds Terminology
 

  Asset Management Company or AMC
  Balanced schemes
  Closed-end scheme
  Contingent Deferred Sales Load (CDSL)
  Debt schemes
  Diversified equity fund
  Entry load
  Equity scheme
  Exit load
  Expense ratio
  Gilt schemes
  Index funds
  Liquid schemes
  Money market schemes
  Mutual fund
  Net Asset Value or NAV
  Open-end mutual scheme
  Rupee cost averaging
  Scheme
  Scheme category
  Scheme’s objective
  Scheme portfolio
  Units of a scheme
 
Asset Management Company or AMC

Investing and managing the collected money is a difficult task. The fund company delegates the job of investment management for a fee to a company of professional investors, usually experts who are known for smart stock picks. This company is the Asset Management Company (AMC)

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Balanced schemes

Balanced schemes invest both in equity shares and in income-bearing instruments. They aim to reduce the risks of investing in stocks by having a stake in both the equity and the debt markets. The fund managers exploit market conditions to buy the best class of assets at each point in time. By mixing stocks and bonds (and sometimes other types of assets as well, like call money or commercial paper), a balanced scheme is likely to give a return somewhere in between those of stocks and bonds. Bonds add stability during market downturns and volatile periods, while stocks provide growth. Since the return on different types of assets rise and fall at different times, the risk is usually lower in balanced schemes than in pure growth or income schemes.

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Close-end scheme

Close-end schemes have fixed maturity periods (ranging from 2 to 15 years). You can invest in the scheme at the time of the initial issue. That’s because such schemes can not issue new units except in case of bonus or rights issue.

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Contingent Deferred Sales Load (CDSL)

Contingent Deferred Sales Load (CDSL) is a charge imposed when the units of a fund are redeemed during the first few years of ownership. Under the SEBI Regulations, a fund can charge CDSL to unitholders exiting from the scheme within the first four years of entry.

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Debt schemes

Debt schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings. These schemes provide returns generally between 7 to 12% per annum.

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Diversified equity fund

Diversified equity funds aim to provide the investor with capital appreciation over a medium to long period (generally 2 – 5 years). These funds invest in equity shares of companies from a diverse array of industries and balances (or tries to) the portfolio so as to prevent any adverse impact on returns due to a downturn in one or two sectors.

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Entry load

The costs of the fund management process that includes marketing and initial costs are charged when you enter the scheme. These charges are termed the entry load, the additional charge you pay when you join a scheme.

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Equity scheme

Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation.

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Exit load

Just like entry load some funds impose a fee when you leave the scheme, i.e., redeem your units, called the exit load.

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Expense ratio

The part of mutual fund assets that gets removed each year for expenses (which includes management fees, annual operating costs, administrative expenses and all other costs incurred by the fund) expressed as a percentage is the expense ratio. It provides a quick check on how efficiently the fund manager is handling the fund.

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Gilt schemes

Gilt schemes invest in government bonds, money market securities or some combination of these.

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Index funds

Index funds are schemes that try to invest in those equity shares which make up a particular index. For example, an Index fund which is trying to mirror the BSE-30 (Sensex) will invest in only those 30 scrips that constitute this particular index. Investment in these scrips is also made in proportion to each stocks weight in the index.

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Liquid schemes

Liquid Schemes provide the investor the facility to enter or exit within a short period of time without any load. You can even invest for two working days. Normally, you can get back your cash within 24 hours of redemption.

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Money market schemes

Money market schemes invest in short-term debt instruments such as T-bills, certificates of deposits, commercial papers, call money markets, etc. Their goal is to preserve the principal while yielding a modest return. They are ideal for corporate and big investors looking for avenues to park their short-term surplus funds.

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Mutual fund

Mutual Funds pool the savings of different investors together, invest them into specific securities (usually stocks or bonds) with a predetermined investment objective (mentioned in the offer document). Investors are issued ‘units’. Thus, for an investor, investments in Mutual Funds imply buying shares (or portions) of the MF and becoming shareholders of the fund.

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Net Asset Value or NAV

Net Asset Value or NAV is the net realizable value of each unit of the scheme. After netting off liabilities from the asset value and dividing by the total number of units outstanding we arrive at the NAV.

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Open-end mutual scheme

In India majority of mutual funds are open-ended. Funds that float open ended schemes can sell as many units as investors demand. These do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. Most people prefer open-ended mutual funds because they offer liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open ended funds can fluctuate on a daily basis.

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Rupee cost averaging

The term ‘Rupee cost averaging’ finds place in the literature of practically all mutual funds. What it basically implies is that a price risk at the entry level can be eliminated to some extent by buying units at various points of time. This results in the purchase of more units when prices are low and purchase of fewer units when prices are high. Eventually, the average cost per unit of the scheme will become smaller and smaller. Rupee cost averaging lessens the risk of investing a large amount in a single investment at the wrong time.

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Scheme

A fund collects money from investors through various schemes. Each scheme is differentiated by its objective of investment or in other words, a broadly defined purpose of how the collected money is going to be invested. Based on these broad purposes schemes are classified into different categories.

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Scheme category

Based on their objectives, schemes have been clubbed together in categories. These are broad market classifications and help investors narrow down their search for a scheme. After shortlisting schemes by their common objectives one can further look into each scheme for more specific differences in their objectives.

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Scheme’s objective

Much like for an individual investor, a scheme’s objective is the result that a fund manger desires out a scheme. While setting objective for a scheme, the manager asks the question: what are the kind of returns I expect the scheme to deliver and to get such returns what securities should I invest in and in what proportion?

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Scheme portfolio

It’s all about the recipe. Just like successful cooking, a fund’s ability to fulfil the moneymaking objective of a scheme is determined by its recipe. The recipe for a scheme is its portfolio, which is mix of the investments the fund intends to make for the scheme. The fund invests its assets by buying a mix of various securities like stocks or bonds. Depending on the scheme’s objective, the fund manager fixes the investment recipe or the portfolio. The portfolio, on any day, consists of the various securities the fund has invested in. By purchasing into a scheme you become a part owner of that portfolio.

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Units of a scheme

When you buy into a scheme of a mutual fund you are holding units of the scheme. Buying units is like owning shares of a scheme

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