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Mutual fund glossary: 49 terms explained

NAV, XIRR, exit load, expense ratio, riskometer and more: what each term means, a worked example, and calculators where they help. Written by Prateek Gupta, CA, CS.

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The basics

NAV (net asset value)NAV is the price of one unit of a mutual fund scheme: the market value of everything the scheme owns, minus its expenses and liabilities, divided by the number of units.AUM (assets under management)AUM is the total market value of the money a mutual fund scheme, or a whole fund house, manages for its investors.FolioA folio is your account number with a fund house. All your investments in that fund house's schemes can sit under one folio.NFO (new fund offer)An NFO is the first subscription period of a new mutual fund scheme, when units are usually offered at ₹10.BenchmarkA benchmark is the market index a scheme measures itself against, such as the Nifty 100 for a large cap fund or a bond index for a debt fund.TRI (total return index)A total return index tracks an index's prices plus the dividends its companies pay, assumed reinvested. It is the fair benchmark for a mutual fund.

Returns and performance

CAGR (compound annual growth rate)CAGR is the steady yearly rate at which an investment would have grown from its starting value to its ending value. It is how one-time investments are compared.XIRRXIRR is the yearly return on investments made at different dates, such as SIP instalments or top-ups. It is the right way to measure a SIP's return.Absolute returnAbsolute return is the simple percentage gain or loss on an investment, without adjusting for how long it was held.Rolling returnsRolling returns are the returns over every possible period of a set length, for example every 5-year stretch, which shows how consistent a fund has been.

Costs and charges

Expense ratio (TER)The expense ratio, or total expense ratio (TER), is the yearly cost of running a scheme, shown as a percentage of its assets and taken out of the NAV every day.Exit loadAn exit load is a charge some schemes deduct from your redemption value if you sell units within a set period, typically to discourage short-term trading.Stamp duty on mutual fundsStamp duty of 0.005% is charged on every mutual fund purchase, including SIP instalments and switches in. There is no stamp duty on redemptions.

Plans and options

Direct planA direct plan is the version of a scheme bought straight from the fund house or a platform without a distributor. It has a lower expense ratio because no distributor commission is paid.Regular planA regular plan is the version of a scheme bought through a mutual fund distributor. Its expense ratio includes the distributor's commission, paid by the fund house.Growth optionIn the growth option, a scheme keeps all its gains invested, so they show up as a rising NAV instead of being paid out.IDCW (income distribution cum capital withdrawal)IDCW, earlier called the dividend option, pays out part of a scheme's value from time to time. The NAV falls by the amount paid, so it is your own money coming back.

Ways to invest and withdraw

SIP (systematic investment plan)A SIP invests a fixed amount in a mutual fund scheme at regular intervals, usually monthly, through an automatic debit from your bank account.Step-up SIPA step-up (or top-up) SIP raises your SIP amount automatically every year, by a fixed amount or percentage, so your investing keeps pace with your income.Lump sum investmentA lump sum is a one-time investment of a larger amount in a mutual fund scheme, as opposed to regular SIP instalments.STP (systematic transfer plan)An STP moves a fixed amount at regular intervals from one scheme to another of the same fund house, usually from a liquid or debt fund into an equity fund.SWP (systematic withdrawal plan)An SWP redeems a fixed amount from your mutual fund holding every month or quarter and pays it to your bank account, giving you a regular income.Rupee cost averagingRupee cost averaging is what happens when you invest a fixed amount regularly: you buy more units when prices are low and fewer when they are high, so your average cost per unit ends up below the average price.SwitchA switch moves your money from one scheme, plan or option to another of the same fund house in one instruction.RedemptionRedemption means selling your mutual fund units back to the scheme at the applicable NAV. The money is paid to your registered bank account.Asset allocationAsset allocation is how you split your money between asset classes such as equity, debt and gold, based on your goals, time horizon and comfort with risk.

Types of funds

Large cap fundA large cap fund invests at least 80% of its money in India's 100 largest listed companies by market value.Mid cap fundA mid cap fund invests at least 65% of its money in companies ranked 101st to 250th by market value.Small cap fundA small cap fund invests at least 65% of its money in companies ranked 251st and below by market value.Flexi cap fundA flexi cap fund invests at least 65% in equity and can move freely between large, mid and small cap companies.ELSS (equity linked savings scheme)An ELSS is an equity fund with a 3-year lock-in whose investments qualify for a tax deduction under the old tax regime, within the overall ₹1.5 lakh yearly limit.Index fundAn index fund copies a market index, such as the Nifty 50, by holding the same shares in the same proportions, instead of picking stocks.ETF (exchange traded fund)An ETF is a fund, usually tracking an index or gold, whose units trade on the stock exchange like shares, at prices that change through the day.Fund of funds (FoF)A fund of funds invests in other mutual fund schemes or ETFs instead of buying shares or bonds directly.Balanced advantage fundA balanced advantage fund, or dynamic asset allocation fund, moves money between equity and debt depending on market conditions, often buying more equity when valuations are low.Arbitrage fundAn arbitrage fund earns the small price gap between a share in the cash market and the same share in the futures market, buying one and selling the other at the same time.Liquid fundA liquid fund invests in debt and money market instruments that mature within 91 days, which keeps it stable and easy to withdraw from.

Risk measures

Riskometer (risk-o-meter)The riskometer is SEBI's six-level label for a scheme's risk, from Low to Very High, worked out every month from what the scheme actually holds.Standard deviationStandard deviation measures how much a fund's returns have swung around their average. The higher it is, the bumpier the ride.Sharpe ratioThe Sharpe ratio shows how much return a fund earned above a risk-free rate for each unit of volatility it took. Higher is better.BetaBeta measures how sensitive a fund has been to moves in its benchmark. A beta of 1 moves with the market; above 1 swings more, below 1 swings less.AlphaAlpha is the return a fund earned above what its benchmark and its level of market risk would suggest. It is a measure of the manager's contribution.Tracking errorTracking error measures how closely an index fund or ETF follows its index: the variability of the gap between the fund's returns and the index's. Lower is better.

Debt fund terms

Macaulay duration and modified durationDuration measures how sensitive a debt fund is to interest rate changes. Modified duration tells you roughly how much the fund's value changes for a 1 percentage point move in rates.YTM (yield to maturity)Yield to maturity is the yearly return a bond, or a debt fund's portfolio, would give if every bond were held until it matures and paid as promised.Credit riskCredit risk is the risk that a borrower whose bonds a debt fund holds fails to pay interest or principal on time, or is downgraded, which lowers the fund's value.

Your account

KYC (know your customer)KYC is the one-time identity and address check you must complete before investing in mutual funds. It is recorded with a KYC registration agency and used by every fund house.NominationA nominee is the person who will receive your mutual fund units if you die. SEBI's rules now let you name up to 10 nominees in a folio and set each one's share.CAS (consolidated account statement)The CAS is a single statement of all your mutual fund holdings across fund houses, sent by the registrars or depositories, with every transaction and the commission paid on each scheme.

General information for education, not investment advice. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.