Mutual fund terms, in plain words

Mutual fund paperwork has its own vocabulary: forms, statements, scheme documents and even app screens use words that are rarely explained. This glossary gives each one a short, plain meaning, arranged A to Z.

It explains words; it does not point you to any scheme. Where a term affects your money, such as a cost, a lock-in or a tax, there is a line on why it matters to you.

A

Absolute return

The simple change in the value of an investment from start to end, shown without regard to how long it took. It is easy to read but hard to compare, because a gain over one year and the same gain over five years look identical.

AMC (asset management company)

The company that runs a mutual fund’s schemes: it decides what to buy and sell within each scheme’s stated rules, and it charges the expense ratio for doing so. The money itself is held separately, by a custodian and under a trustee, not in the AMC’s own accounts.

AMFI

The Association of Mutual Funds in India, the industry body of the AMCs. It registers mutual fund distributors, issues the ARN, sets a code of conduct for them and publishes NAVs and investor education.

Allotment

The point at which units are credited to your folio after your money reaches the fund. The NAV you get depends on when the money is actually received, not when you clicked “invest”.

ARN

The AMFI Registration Number, given to a mutual fund distributor who has passed the required certification. Check the ARN of anyone who sells you a mutual fund; AMFI’s website lets you look it up.

Asset allocation

How your money is divided between kinds of assets, such as equity, debt and gold. It is usually the biggest single driver of how much your investments rise and fall, more than the choice of any one scheme. The right mix depends on your goals, time and comfort with risk, so there is no single answer.

AUM (assets under management)

The total market value of the money a scheme, or an AMC, manages for its investors. A large AUM tells you a scheme is widely held; it does not, by itself, tell you whether it suits you.

B

Benchmark

The index a scheme names in its documents as the yardstick to compare its performance against. Comparing a scheme with its own benchmark, over the same period, is fairer than comparing it with a different kind of scheme.

C

CAGR (compound annual growth rate)

The steady yearly rate at which a starting value would have to grow to reach an ending value over a period. It smooths out the ups and downs, so it says nothing about how bumpy the ride was. It suits a single lumpsum; for many instalments, XIRR is the right measure.

Capital gains

The profit you make when you redeem or switch units for more than you paid. Gains are taxed as short-term or long-term depending on how long you held the units, and equity-oriented and other schemes are treated differently. The holding periods and rates are set by tax law and change; check the current rules before you redeem.

CAS (consolidated account statement)

One statement that shows all your mutual fund holdings across AMCs, linked by your PAN, along with transactions in the period. It also shows the costs and the commission paid to your distributor, so it is worth reading, not just filing.

CKYC (Central KYC)

A central registry of KYC records, which gives you a single KYC identification number. It lets one verified record be used across banks, insurers and investment firms, so you do not have to repeat the process each time.

Closed-ended fund

A scheme that takes money only during its launch period and runs for a fixed term. You usually cannot redeem it with the fund before maturity; units may be listed on a stock exchange, where selling depends on finding a buyer.

Credit risk

The risk that a borrower whose bonds a debt fund holds does not pay interest or repay on time. Lower-rated borrowers pay more interest because this risk is higher, which is why a higher yield is never free.

Cut-off time

The time of day, set by SEBI’s rules, by which money must reach the fund for you to get that day’s NAV. Money that arrives later gets a later day’s NAV, so payment delays can change the price you get.

D

Debt fund

A scheme that lends money by buying bonds, government securities and money market instruments, and earns interest on them. It is generally less volatile than equity, but it is not without risk: interest rate changes and credit risk move its NAV.

Direct plan

A version of a scheme bought straight from the AMC, with no distributor involved. Its expense ratio is lower because no distributor commission is built in; you take on choosing, reviewing and servicing the investment yourself.

Distributor (mutual fund distributor, MFD)

A person or firm registered with AMFI, holding an ARN, who helps you choose and invest in regular plans and services them afterwards. A distributor is paid a commission by the AMC from the scheme’s expenses, not a fee from you.

Drawdown

The fall from a previous peak value to a low point, before the value recovers. It shows how deep a loss an investor would have had to sit through, which matters as much as the average outcome.

Duration

A measure of how sensitive a debt fund’s NAV is to changes in interest rates. The longer the duration, the more the NAV rises when rates fall and drops when rates rise.

E

ELSS (equity-linked savings scheme)

An equity scheme whose investments can qualify for an income tax deduction, depending on the tax regime you choose and the tax law in force; check the current rules. Each investment, including each SIP instalment, is locked in for three years from its own date.

Equity fund

A scheme that invests mainly in shares of companies. Its value can rise and fall sharply in the short run, which is why it is usually meant for money you will not need for many years.

ETF (exchange traded fund)

A scheme, usually tracking an index, whose units are bought and sold on a stock exchange during market hours, at the market price. You need a demat and trading account, and the traded price can differ a little from the NAV.

EUIN (employee unique identification number)

A number given to each individual employee or salesperson of a distributor firm, recorded on your transaction. It shows which person dealt with you, so there is accountability if something goes wrong.

Exit load

A charge, set out in the scheme’s documents, for redeeming or switching out within a stated period after investing. It is deducted from what you receive, so check it before you redeem early.

Expense ratio (TER)

The total expense ratio is the yearly cost of running a scheme, taken out of the scheme’s assets every day and already reflected in the NAV. You never see it as a separate bill, which is exactly why it is worth comparing.

F

Factsheet

A monthly document from an AMC that shows each scheme’s portfolio, size, expense ratio, risk level and other details. It is a snapshot of one month, not a forecast.

Fee-based advice (a separate registration)

SEBI registers a separate category of professional who charges you a fee to recommend investments, and is paid by you rather than by any product. A distributor is not that, and is not registered to be: a distributor earns a commission from the fund house out of the scheme’s expenses.

Knowing which of the two you are dealing with tells you how the person in front of you is paid, which is worth knowing before you take anyone’s suggestion. Both registrations can be checked: a distributor’s ARN on AMFI’s website, the other on SEBI’s.

Folio

Your account number with an AMC. One folio can hold several schemes of the same AMC; keeping fewer folios makes statements and updates simpler.

Fund of funds

A scheme that invests in other mutual fund schemes or ETFs rather than directly in shares or bonds. You may bear the costs of both the outer scheme and the schemes it holds, so read the total cost.

G

Growth option

The option where any profit stays invested in the scheme and shows up as a rising NAV, rather than being paid out. You receive the money only when you redeem.

H

Hybrid fund

A scheme that holds a mix of asset classes, usually equity and debt, in proportions set out in its category rules. The mix decides how much it rises and falls, so read which kind of hybrid it is.

I

IDCW (income distribution cum capital withdrawal)

The option, formerly called “dividend”, where the scheme pays out part of its value to you from time to time. The payout comes out of your own NAV, it is not extra income on top, and it is taxed in your hands.

Index fund

A scheme that aims to copy an index by holding the same securities in the same proportions. Its costs are usually lower than actively managed schemes, and the gap between its return and the index’s, called tracking error, is worth checking.

Interval fund

A scheme that is mostly closed but opens for purchases and redemptions only during set windows. Your money is not available outside those windows.

J

Joint holding

A folio held by more than one person, up to three. In the “joint” mode all holders must sign for transactions; in “anyone or survivor” any one of them can.

K

KIM (key information memorandum)

A short summary of the scheme information document, attached to application forms. It gives the essentials: objective, risk, costs, loads and minimums.

KRA (KYC registration agency)

An agency registered with SEBI that holds your KYC record for the securities market. Once your KYC is registered there, every AMC and broker can rely on it.

KYC (know your customer)

The identity and address verification you complete once before investing, with your PAN and other documents. If your KYC is on hold or incomplete, purchases and sometimes redemptions can be stopped until it is fixed.

L

Large-cap, mid-cap and small-cap funds

Equity schemes defined by the size of the companies they mainly invest in, using a list of companies ranked by market value that is published for the industry. Smaller companies tend to swing more in price than larger ones. These are descriptions of categories, not a view on which one anyone should hold.

Liquid fund

A debt scheme that invests in instruments maturing within about three months. It is used for money you may need soon; its NAV moves little, but it is not without risk.

Lumpsum

A single, one-time investment of a sum of money, as opposed to regular instalments. Your whole amount goes in at one day’s NAV.

M

Mandate (NACH, UPI autopay)

Your standing instruction to your bank to pay SIP instalments automatically on the chosen date. NACH is the bank network used for most mandates; UPI autopay is the same idea through UPI. If the money is not in your account on the date, the instalment fails and your bank may charge you.

N

NAV (net asset value)

The value of one unit of a scheme, worked out each business day from the market value of its holdings minus its expenses. A low NAV does not mean a scheme is cheap, and a high one does not mean it is expensive.

Nominee

The person, or people, you name to receive your units if you die. Adding a nominee makes it far easier for your family to claim your investments.

O

Open-ended fund

A scheme you can buy into and redeem from on any business day, at that day’s NAV. Most mutual fund schemes are open-ended.

Overnight fund

A debt scheme that invests in securities maturing the next business day. It carries very little interest rate or credit risk, which is also why it earns little.

P

P/E ratio (price to earnings)

A company’s share price divided by its earnings per share, a rough gauge of how expensive a share or a market is relative to profits. Factsheets often show it for a scheme’s whole portfolio.

Portfolio turnover

How much of a scheme’s holdings are bought and sold over a year. High turnover means the fund manager trades a lot, which adds trading costs that are not part of the expense ratio.

R

Rebalancing

Bringing your mix of assets back to the proportions you chose, after market moves have pushed it off course. It usually means trimming what has grown and adding to what has lagged; the tax and exit loads on any switch are part of the decision.

Redemption

Selling your units back to the fund. The money is paid to your registered bank account, within timelines that SEBI sets, at the NAV of the day the request is accepted.

Regular plan

A version of a scheme bought through a distributor. Its expense ratio is higher than the direct plan’s because it includes the distributor’s commission, which pays for the distributor’s help and service.

Riskometer

A label every scheme must carry showing its level of risk, on a scale from “Low” to “Very High”. It is reviewed every month, so the level can change as the portfolio changes.

Rolling returns

Returns measured over many overlapping periods of the same length, for example every possible three-year stretch in a decade. They show the range of outcomes an investor could have had, rather than one start and end date chosen by someone else.

RTA (registrar and transfer agent)

The firm that keeps investor records and processes transactions on behalf of AMCs. Statements, address changes and nomination updates are often handled through the registrar.

Rupee cost averaging

What happens when you invest a fixed sum at regular intervals: you buy more units when the NAV is low and fewer when it is high. It does not remove the risk of loss; it spreads your buying over time.

S

SCORES (SEBI Complaints Redress System)

SEBI’s online system for complaints against market intermediaries, including AMCs and their agents. Complain to the AMC or intermediary first; if the reply does not resolve it, escalate on SCORES.

Scheme information document (SID)

The scheme’s main legal document: its objective, how it invests, its risks, costs, loads and rules. The phrase “read all scheme related documents carefully” refers to this document and the KIM.

SEBI

The Securities and Exchange Board of India, the regulator of the securities market, including mutual funds. It writes the rules on what schemes may hold, how they are categorised, what they may charge and how they treat investors.

Sectoral and thematic funds

Equity schemes that invest in one sector, such as banking, or one theme, such as consumption. Because they are concentrated, they can rise and fall far more than a broad equity scheme.

SIF (specialised investment fund)

A newer product category under SEBI’s mutual fund rules, offered by eligible AMCs, that may use strategies an ordinary mutual fund cannot, such as limited short positions through derivatives. It carries a much higher minimum investment set by SEBI and is meant for investors who understand the extra risks; distributors need a separate certification to offer it.

SIP (systematic investment plan)

A way of investing a fixed amount in a scheme at regular intervals, usually monthly, through a bank mandate. It is a method of paying in, not a type of fund.

SMART ODR

The online dispute resolution portal for the securities market. If a complaint is not settled by the intermediary or through SCORES, you can take it here for conciliation and, if needed, online arbitration.

Stamp duty

A government duty charged on the purchase of mutual fund units, including each SIP instalment and switch-in. It is a small deduction from the amount invested, so slightly fewer units are allotted.

Step-up SIP

A SIP that rises by a set amount or proportion at regular intervals, usually each year. It lets your instalments grow as your income does, without starting new SIPs.

STP (systematic transfer plan)

A regular, automatic transfer of a fixed amount from one scheme to another of the same AMC. Each transfer is a redemption from one scheme, so it can carry exit load and tax.

STT (securities transaction tax)

A tax collected when you redeem or switch out of equity-oriented schemes. It is deducted from the payout automatically.

Switch

Moving money from one scheme to another within the same AMC in one request. For tax, a switch is a redemption followed by a purchase, so it can create capital gains.

SWP (systematic withdrawal plan)

A regular, automatic redemption of a fixed amount from a scheme, often used to draw an income. Each withdrawal is a redemption, so it carries the same tax and exit-load rules.

T

Trail commission

The commission an AMC pays a distributor for as long as you stay invested in a regular plan, out of the scheme’s expenses. It is part of the higher expense ratio of a regular plan, and your CAS shows how much was paid.

Transmission

The transfer of units to a nominee or legal heir after the holder’s death. With a nominee registered it is a simpler set of documents; without one, the family may need legal papers to prove their claim.

U

Units

The shares of a scheme you own. The number of units you hold, multiplied by the NAV, gives the current value of your investment.

V

Volatility

How much and how often a scheme’s value moves up and down. Higher volatility means a wider range of outcomes over short periods, in both directions.

X

XIRR (extended internal rate of return)

An annual rate of return that takes account of the date and size of every payment in and out. It is the right way to measure an SIP or any investment made in instalments.

Where to go from here

Most of these terms appear on your consolidated account statement and on a scheme’s key information memorandum. Reading those two documents with this list beside you is a good way to see them in use.