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Financial Glossary

A
Accounting Rate of Return (ARR)

A quick estimate of projects worth calculated by averaging profits before interest and tax over the life of the project to investment.

Ad-Valorem Tax

Ad-Valorem Tax is a tax based on the value of a real estate or personal property. It is imposed at the time of a transaction as in the case of a sales tax or value-added tax (VAT).

Adviser

An organization employed by a mutual fund to give professional advice on the fund’s investments and asset management practices. Also known as investment adviser.

Affiliated Company

Company, or other organization related through common ownership, common control of management or owners, or through some other control mechanism, such as a long term lease.

After-tax return

The total return of a fund after the effects of taxes on distributions and/or redemptions have been assessed. Funds are required by federal securities law to calculate after-tax returns using standardized formulas based upon the highest tax rates. (Consequently, they are not representative of the after-tax returns of most mutual fund shareholders.) These standardized after-tax returns are not relevant for shareholders in tax-deferred retirement accounts.

Allotment

Final number of shares granted to an applicant against the application Number of shares granted to underwriters for selling.

American Options

Buyer/Holder can exercise the option on any day during expiration period.

Annual Financial Statement

It is another term for annual budget of the country and details the estimated annual receipts and expenditures to be presented to Parliament by the Government. The statement is divided into three parts: Consolidated Fund, Contingency Fund and Public Account.

Annual report

A report that a fund sends to its shareholders that discusses the fund’s performance over the past fiscal year and identifies the securities in the fund’s portfolio on the last business day of the fund’s fiscal year. The annual report includes audited financial statements.

Application Money

Money required to be paid along with the application form as per the number of shares applied for.

Appropriation Bill

The Appropriation Bill authorizes the Government to incur expenditure from and  out of the Consolidated Fund of India.

Asset

A resource owned and controlled by an entity, could be an individual, a corporate or a state, in expectation of probable future benefit. E.g. – Machine for production, land for farming, Stocks, Bonds.

Asset Allocation

Percentage distribution of fund corpus into various asset classes majorly, equity and debt.

Asset Management Company (AMC)

An investment management firm which manages the investment corpus of a mutual fund as per the objectives defined for a fee.

Assets Under Management (AUM)

Total investment corpus managed by an AMC irrespective of the number of funds. In context of mutual fund it is the investible corpus available with the fund.

Auction market preferred stock (AMPS)

A type of preferred share. AMPS are structured to pay dividends at rates set through auctions run by an independent auction agent.

Authorized participant

An entity, usually an institutional investor, that submits orders to the exchange-traded fund (ETF) for the creation and redemption of ETF “creation units.”

Automatic reinvestment

A fund service giving shareholders the option to purchase additional shares using dividend and capital gains distributions.

Average portfolio maturity

The average maturity of all the securities in a bond or money market fund’s portfolio.

B
Balance Of Payments (BoP)

BoP records all transactions of an economy with the rest of the world for a specific period.

Balance Of Trade

It represents the difference between monetary value of exports and imports in an economy over a certain period of time. Positive value denotes trade surplus whereas negative value denotes trade deficit.

Balance Sheet (B/S)

A financial statement summarizing the financial position of a company on a particular date. It represents the sources of funds (Liabilities) and application of the same (Assets).Further, the statement also bifurcates among the various sources of fund from the lenders point of view i.e. owner (Internal Liabilities – Capital and Reserves and Surplus) and creditors (External Liabilities – Loans and Advances).

Bank Rate

The rate at which RBI lends money to commercial banks is known as Bank rate. Central bank uses it as a tool to manage monetary stability in the economy. Any upward revision in Bank Rate will make banks to increase deposit rates and also an increase the interest on loan. On the flip side, if central bank slashes bank rate, then banks are likely to reduce interest on loans and interest on bank deposit.

Base Rate

The Base Rate is the minimum interest rate below which a Bank cannot lend, except in cases allowed by RBI. Individual banks are free to decide their base rates based on their choice of benchmarks. There can be only one Base Rate for each bank.

Basis point

One one-hundredth of 1 percent (0.01 percent); thus, 100 basis points equal 1 percent. When applied to $1.00, 1 basis point is $0.0001; 100 basis points equal one cent ($0.01).

Bear market

A period during which the majority of securities prices in a particular market (such as the stock market) drop substantially. One generally accepted measure is a price decline of 20 percent or more over at least a two-month period. Contrast bull market.

Benchmark

Standard index set to compare the performance of a mutual fund.

Beta

The measure of the systematic risk of a fund, Beta helps in identifying the tendency of a fund to market swings. Beta describes the correlated volatility of a fund in relation to the volatility of the benchmark that the fund is being compared to. Beta is calculated using regression analysis. Beta value greater than 1 signifies that the movement of the fund is generally in the same direction as, but more than the movement of the benchmark.

Book Building

A process of determining the offer price for an IPO based on the demand of investors for a security. Bids are invited from investors in a price band to analyse the demand at various price levels.

Book Running Lead Managers (BRLM)

Primary underwriter(s)/syndicate member(s) responsible to carry out sale of shares in a new issue.

Book Value Per Share

Amount which shareholders will receive on each share held in case company goes into liquidation. Is arrived at by total assets minus external liabilities and intangible assets to total number of shares outstanding .

Break the dollar

A phrase used to describe when the net asset value (NAV) of a money market fund is repriced from its stable $1.00 NAV, an event that could be triggered by a deviation greater than one-half of 1 percent (one-half cent, or $0.0050) between the fund’s mark-to-market value (shadow price) and its stable $1.00 NAV. Also known as break the buck.

Breakpoints

The dollar amounts at which many mutual funds offer reduced fees to investors. There are two kinds of breakpoints. One kind is a reduction in sales charges (load fees) to investors when they initially purchase fund shares. The amount of the discount varies, depending upon the amount of the investment: the more invested, the greater the likelihood of surpassing a “breakpoint” and thus receiving a discount. The other kind of breakpoint is a reduction in management fees that fund advisers may charge their associated funds as fund assets surpass a given level.

Broker-dealer

A firm that buys and sells mutual fund shares and other securities from and to investors, operating as either a broker or dealer depending on the transaction.

Budget Estimates

Estimates of the total expenditure and income received during the financial year.

Budgetary Deficit

The status of an economy where expenditures exceeds revenues over a certain period is referred to as budgetary deficit.

Bull market

A period during which a majority of securities prices in a particular market (such as the stock market) rise substantially. Contrast bear market.

C
Call Option

An option under which buyer has a right but not the obligation to buy the underlying asset at strike price from the seller on/until a fixed date mutually agreed.

Callable Bonds

Bonds issued with a right vested with issuer to redeem the bonds before maturity. If issuer is in a position to raise money at lower interest rate he might redeem bonds issued at higher interest rates earlier and raise fresh debt at lower interest rates.

Cap Price

Upper limit of price band.

Capital

A Resource available in cash or kind for investment to generate income in future. The initial amount brought in by the owner for commencing the business operations and is of permanent nature unlike other liability. Also known as “Owner’s Equity”.

Capital Asset Pricing Model

Model stating the premium an investor would look for the level of risk undertaken over and above the risk-free rate of return. It calculates the total return an investment should give for the assumed level of risk in the investment. Ri = Rf + ß (Rm - Rf).

Capital Budget

Capital Budget is the statement of capital receipts and capital payments of Government.

Capital Expenditure

Expenditure made for acquiring fixed assets such as land, building, machinery and equipment. The assets will accrue benefits to the buyer for more than a year.

Capital Goods

Goods used in the production of goods and services. For example: Machinery.

Capital Payments

Expenses incurred to acquire capital assets.

Capital Receipt

Capital Receipts consist of cash flows received from non-operating activities of business. In case of a country, loans raised by the government from the market, RBI & other parties, sale of Treasury Bills and loans received from foreign governments form capital receipts.

Cash Flow Per Share (CFPS)

Measure to estimate the cash generated on per share basis; computed as operating cash flow less preference dividends to number of outstanding shares of common stock.

Cash Flows

Net of cash receipts and cash disbursements relating to a particular activity during a specified accounting period.

Cash Reserve Ratio

Commercials Banks are required to keep a portion of the deposits as cash with the Central Bank before providing credit to the customers. This portion expressed as % of total deposits is called as Cash Reserve Ratio. CRR is used as a tool to manage liquidity in the banking system.

Catch-up contribution

Individuals aged 50 or older are permitted to make contributions to an IRA or employer-sponsored retirement savings plan in excess of the annual contribution limit. In 2010, the catch-up limit was $1,000 for IRAs, $2,500 for SIMPLE plans, and $5,500 for 401(k) plans.

Central Plan Outlay

It is government’s budgetary support to the Plan. It is the division of monetary resources among different sectors in the economy and ministries of the government.

Cenvat

Also known as Central Excise Duty, Cenvat or Central Value Added Tax is a duty imposed on production of goods in India. Here the value addition means the additional services/processes etc. which converts the input in to a output. It was earlier known as MODVAT or modified value added tax.

Certificate of Deposit

A promissory note issued by depository institution, usually commercial banks, stating amount deposited, interest rate applicable and maturity. It is a time liability and therefore, restricts withdrawal before maturity. However, withdrawal before maturity is possible by paying the penalty but still after a minimum stipulated time.

Cess

This is an additional levy on the basic tax liability that Governments impose to generate additional revenues for meeting specific expenditure. For Example: 2% Education Cess implies that the individual has to shell out an additional 2 Rs to govt in case his total tax burden is 100 Rs.

Clearing house

An agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data. Clearing houses act as third parties to all futures and options contracts - as a buyer to every clearing member seller and a seller to every clearing member buyer.

Closed End Mutual Fund

Mutual fund with a fixed number of shares outstanding that may be bought or sold.

Commercial Paper

Short-term unsecured obligation issued at discount to par value by banks or corporations to finance working capital needs. Maturity ranges from 2 to 270 days.

Common Stock

Capital stock having no preferences generally in terms of dividends, voting rights or distributions. (see preferred stock.)

Company

An artificial person created by law as a voluntary association of individuals for profit, having capital divided into transferable shares. Ownership of the organization is subject to condition of membership.

Compound Annual Growth Rate

Compounded rate of increase in the value of investment or wealth over several years. For example – An investment of Rs 10,000 has grown to Rs 16,111 over a five year period with different rate of returns in the 5 years. CAGR would be 10%, i.e. it represents cumulative effect of gains or losses over several years .

Compounding

The effect of growth on reinvestment of future earnings. Over time, compounding can produce significant growth in the value of an investment.

Consolidated Fund

Consolidated fund or the consolidated revenue fund is main bank account of the Government of the country.

Consumer Price Index

Also known as Retail Inflation, the Consumer Price Index or CPI measures and tracks the changes in retail prices of a representative basket of consumer goods and services. Retail inflation of 10% means that the value of CPI for a particular month went up by 10% on yoy basis. Calculated by Central Statistics Office (CSO) under the Ministry of Statistics and Program Implementation (MOSPI), CPI indicates price rises that directly impact a common man and thereby influences the fiscal and monetary policy decisions taken by government and RBI.

Contingency Fund

It is a fund for emergencies or unexpected outflows, mainly economic crises. The fund is at the disposal of the President to meet unforeseen and urgent expenditure, pending approval from Parliament. and is recouped after withdrawal.

Contingent deferred sales load (CDSL)

A fee imposed by some funds when shares are redeemed (sold back to the fund) during the first few years of ownership. Also known as back-end load.

Contract Size

Specification of quantity of underlying asset as applicable to contracts.

Corpus

Also known as assets under management (AUM) or asset size, It is the total market value of all the holdings managed by a fund or a fund house. The corpus of a fund or fund family denotes the success in attracting money from investors. Caution: Bigger is not necessarily the better.

Cost of Capital

The minimum required return to make an investment feasible or the minimum return expected by the providers of capital, equity and debt, from the investment.

Countervailing Duties (CVD)

Countervailing duties (CVDs) also known as anti-subsidy duties are trade import duties imposed under World Trade Organization (WTO) rules to neutralize the negative effects of subsidies.

Coupon Rate

The rate of interest applicable on loan amount/bonds issued.

Coverdell Education Savings Account (ESA)

This type of account, formerly known as an education IRA, is a tax-advantaged trust or custodial account set up to pay the qualified education expenses of a designated beneficiary.

CPI - Consumer Price Index

Also known as Retail Inflation, the Consumer Price Index or CPI measures and tracks the changes in retail prices of a representative basket of consumer goods and services. Retail inflation of 10% means that the value of CPI for a particular month went up by 10% on yoy basis. Calculated by Central Statistics Office (CSO) under the Ministry of Statistics and Program Implementation (MOSPI), CPI indicates price rises that directly impact a common man and thereby influences the fiscal and monetary policy decisions taken by government and RBI.

Creation unit

A specified number of shares issued by an exchange-traded fund (ETF) in large blocks, generally between 25,000 and 200,000 shares. Authorized participants that buy creation units either keep the ETF shares that make up the creation unit or sell all or part of them on a stock exchange.

Credit Policy

An announcement made by the RBI after a review of the Indian economy is termed as credit policy. It announces changes in key credit management tools like the bank rate, repo rate, reverse repo rate, SLR and CRR.

Credit Rating

Evaluation of ability to meet the interest and principal amount obligation by an individual or a corporation represented on a scale (4/5) or using a grade (AAA). Involves detailed analysis of credit history, current financial position and likely future income.

Credit risk

The possibility that a bond issuer may not be able to pay interest or repay its debt.

Credit spread

The additional yield required of a debt security beyond that of a risk-free alternative (such as a U.S. Treasury instrument of the same maturity).

Current Account Deficit

Differential number between the exports and imports of a country in situation where imports exceed exports. It signifies negative net revenues from rest of the world.

Current Account Surplus

Differential number between the exports and imports of a country in situation where exports exceed imports. It signifies positive net revenues from rest of the world.

Current Market Price (CMP)

The agreed price between buyer and seller for a security.

Current Yield

Coupon income that a bond would generate reflected as a percentage to the current market price.

Custodian

An organization, usually a bank, that safeguards the securities and other assets of a mutual fund.

Custom Duties

A type of indirect tax, custom duty is levied on goods whenever they are either brought into the country or exported from the country.

Cut-off Price

In book building process, lowest offer price at which the complete issue of securities gets subscribed determined by underwriters within price band.

D
Debt Fund

A Fund that primarily invests its corpus into debt securities like corporate bonds, government securities etc.

Default

A failure by an issuer to: (1) pay principal or interest when due, (2) meet nonpayment obligations, such as reporting requirements, or (3) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).

Defined benefit (DB) plan.

An employer-sponsored pension plan where the amount of future benefits an employee will receive from the plan is defined, typically by a formula based on salary history and years of service. The amount of contributions the employer is required to make will depend on the investment returns experienced by the plan and the benefits promised. Contrast defined contribution plan.

Defined contribution (DC) plan

An employer-sponsored retirement plan, such as a 401(k) plan or a 403(b) plan, in which contributions are made to individual participant accounts. Depending on the type of DC plan, contributions may be made by the employee, the employer, or both. The employee’s benefits at retirement or termination of employment are based on the employee. and employer contributions and earnings and losses on those contributions.

Demand For Grants

It is a statement of estimate of expenditure from the Consolidated Fund. It requires the approval of the lower house of Indian parliament.

DEMAT

Also known as dematerialisation is a process of moving a physical stock to electronic system of book-keeping. The account under which the stock is held for an owner is called “DEMAT Account”. These accounts are maintained by depositories.

Depository

Generally a bank or a company entrusted to hold funds or securities on behalf of owners as a safe custody. It also provides transfer service for transaction held and hold stocks in dematerialised form. In India, depositories for securities are Central Depository Services Limited (CDSL) and National Securities Depository limited (NSDL).

Direct Taxes

Taxes paid directly by the person or organization like Income Tax and Corporate Tax.

Disinvestment

The process of government selling its stake in Public Sector Undertakings is termed as disinvestment.

Distribution

(1) The payment of dividends and capital gains, or (2) a term used to describe a method of selling fund shares to the public.

Diversification

The practice of investing broadly across a number of different securities, industries, or asset classes to reduce risk. Diversification is a key benefit of investing in mutual funds and other investment companies that have diversified portfolios.

Dividend

Portion of after tax earnings distributed as decided by the board of directors of the company as per the number and class of stock held.

Dividend Pay-out

Paying out a portion of fund profits to the unitholders. Scheme NAV is reduced by the vale equal to the distributed dividend per unit.

Dividend Per Share (DPS)

Total amount of earnings distributed divided by the outstanding number of shares of the particular class of stock.

Dividend Reinvestment

Option to buy units of amount equal to the dividend entitled of same mutual fund. This increases the number of units held b an unitholder. Growth Option Profits made by fund are ploughed back into the scheme. Unlike dividend reinvestment, NAV of the scheme increase and not units.

Duration/Macaulay’s Duration

Sensitivity of a bond’s price to change in interest rate expressed in terms of years. It is also a measure to know how long will it take for a bond to repay its price.

E
e-IPO

An issue of capital to public through the on-line system of the stock exchange.

Earnings Before Interest and Tax (EBIT) / Operating Income

Measure of operating power of a company as excludes extraordinary or non-recurring income and expenses. It is closely watched by creditors as also reflects meeting interest obligation capacity by the company.

Earnings Before Interest, Depreciation and Tax (EBIDT)

Approximate measure of companies operating cash flows calculated by deducting operating and non-operating expenses from the total revenue. It is also a measure of profitability without considering capital structure and tax laws.

Earnings Per Share (EPS)

Measure of performance calculated by dividing the net earnings of a company by the average number of shares outstanding during a period.

Entry Load

A per units based charge collected by a mutual fund when investor buys its units. It is a percentage value pegged to current NAV of the fund. It varies for different investment levels.

Equity Linked Savings Scheme (ELSS)

These schemes offer tax rebates to the investors under sec 80(C) of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues.

Equity Oriented Fund

A fund that primarily invests its corpus in common stocks. It can be further classified according to the investment objective like:- Fund Investing in equity of a particular sector (Thematic Funds) Fund investing in multiple sectors (Equity diversified).

Equity Share Capital

Capital representing owners’ stake in the business divided by number of shares of equal face value called equity stock or common stock. It is not repaid to the owners in normal course of business.

Estimated Tax

Amount of tax LIABILITY a taxpayer may expect to pay for the current tax period. Usually paid through quarterly installments.

European Options

Can be exercised only on last day of the expiration period by the buyer/holder.

Ex-dividend date

With regard to mutual funds, this is the day on which declared distributions (dividends or capital gains) are deducted from the fund’s assets before it calculates its net asset value (NAV). The NAV per share will drop by the amount of the distribution per share.

Exchange privilege

A fund option enabling shareholders to transfer their investments from one fund to another within the same fund family as their needs or objectives change. Typically, fund companies allow exchanges several times a year for a low fee or no fee.

Exchange Traded Fund (ETF)

ETF are index funds with the difference that they are traded on stock exchanges. Unlike normal funds they can be bought and sold on intra-day basis and transaction is done through brokers hence, brokerage is charged and not loads. Another feature is that they resemble to close-end funds to the extent that the trades done doesn’t affect the total corpus available with the issuer.

Exchange-traded fund (ETF)

An investment company, typically a mutual fund or unit investment trust, whose shares are traded intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares through a broker just as they would the shares of any publicly traded company.

Excise Duties

These are the duties which are imposed on goods produced within the country.

Exit Load

A per units based charge collected by a mutual fund when investor sells its units. It is a percentage value pegged to current NAV of the fund. It varies for both amount of investment and for time investment held.

Expense

Cash or equivalents spent for meeting basic living requirements; for generating revenue and conducting business operations; by requirement of law. E.g. – Spent on food for an individual, purchase and processing costs of raw material during production, Tax payments.

Expense Ratio

The expense ratio is calculated on annual basis by dividing fund's operating expenses by the average rupee value of its assets under management. Expense ratio is expressed in terms of percentage of fund’s average net assets. An expense ratio of 1% indicates that each year 1% of the fund's corpus will be used to cover expenses.

Expense ratio

A fund’s total expenses—disclosed in the prospectus and shareholder reports—expressed as a percentage of its assets.

Expiration Period

The period for which contract remains valid is called expiration period.

Expiry

Date on which contract expires.

F
Fama Ratio

The difference of the average fund returns and the returns that should have been generated based on Capital Market Line (CML) theory. Since this is attributed to superior security selection it is also called as Net Selectivity.

Family of funds

A group or “complex” of mutual funds, each typically with its own investment objective, managed and distributed by the same company.

Finance Bill

The finance bill contains proposals by the government concerning matters related to taxation structure. It may include imposition of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament.

Fiscal Deficit

It is the difference between the Revenue Receipts and Total Expenditure.

Fiscal Policy

Fiscal policy is a change in government expenditure and/or taxation designed to influence economic activity and control the level of aggregate demand in the economy.

Fixed Assets

An asset whose benefits are expected to be reaped over several years i.e. for a longer span of time. E.g. – Plant and Machinery, Buildings, Furniture.

Fixed Price Offers

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price.

Fixed Rate

Fixed rate implies that coupon rate is fixed or will be unchanged during the term of debt.

Floating Rate

Floating rate implies that coupon rate will be depend on the benchmark decided and would be subject to change at the regular intervals during the until maturity. E.g. – PLR + 0.5%, this means the rate of interest is dependent on the changes in PLR.

Floor Price

Lower limit of price band.

Follow-on Public Offer (FPO)

Offering of shares to investors by a public company subsequent to IPO.

Foreign Institutional Investor (FII)

FII means an entity established or incorporated in the country outside the country in which it is investing.

Forward pricing

The concept describing the price at which mutual fund shareholders buy or redeem fund shares. Shareholders must receive the next computed share price following the fund’s receipt of a shareholder transaction order.

Front-end load

A fee imposed by some funds at the point of purchase.

Fund Manager

A Person(s) responsible for executing investment strategy and trading activities of a mutual fund as per the stated investment objective.

Fund of Funds (FOF)

A Fund which invests in other mutual fund schemes and not directly into equity, debt or commodities. It is a portfolio of fund schemes.

Fund supermarket

A brokerage platform that provides access to funds from a wide range of fund families.

Funds of funds

Mutual funds that primarily hold and invest in shares of other mutual funds.

Futures

An Agreement between buyer and seller to receive or deliver underlying asset on a predetermined future date at a price negotiated today.

G
Global Depository Receipt (GDR)

A negotiable certificate issued by a bank of one country representing a specific number of shares of stock of another country held as custodian, traded on the bourses of issuing country.

Goodwill

An intangible asset reflecting reputation of business, strong brand loyalty, among customers, good relations with customers, high morale of employees which provides the business with a distinct competitive edge over its peers as a monetary value . It is a sellable asset.

Green-Shoe Option

An option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism. In India, this is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size.

Grey Market

OTC market for unofficial trading of company’s share before the share lists on exchange.

Gross Domestic Product

Value of all goods and services produced by a country in an accounting year measured at domestic prices.

Gross Domestic Product (GDP) / National Income

Value of all goods and services produced by a country in one accounting year measured at domestic prices.

Gross National Product

Gross National Income is calculated as Gross Domestic Product (+) income earned by the local residents from investments made abroad (-) the income earned by foreigners in the domestic market.

GST (Goods and Services Tax)

A GST (Goods and Services Tax) is a value added tax levied on goods and services sold for domestic consumption. If implemented, it will harmonize all indirect taxes.

Guarantee

An agreement to repay the amount borrowed with interest to the lender in case of borrowing entity defaults or fails to do so.

Guarantor

A person or corporation who guarantees debt.

H
Health savings account (HSA)

A plan that allows workers with high-deductible health insurance coverage to set aside money each year for routine or future health care costs.

Hedge fund

A private investment pool for qualified (typically wealthy) investors that, unlike a mutual fund, is exempt from SEC registration.

High Net-Worth Investor (HNI)

Also called High Net-Worth Individuals (HNWI), is a term to classify a person or a family on the basis of liquid assets owned as a different class of investors. The base value of net-worth to be classified as HNI differs from country to country.

Hybrid fund

A mutual fund that invests in a mix of equity and fixed-income securities.

I
IIP - Index of Industrial Production

Index of Industrial Production (IIP) represents the status of industrial production for a particular period as compared to a reference period. In India, It is compiled and published monthly by the Central Statistics Office (CSO) under the Ministry of statistics and program Implementation (MOSPI) with an approximate time lag of six weeks from the reference month. IIP growth declared in % (year on year comparison) is an important macro-economic indicator to judge the general level of industrial activity in the economy. Greater the growth in IIP, greater will be the confidence of investors investing in economy.

Income

Cash or equivalents generated from an investment, through work or a business activity. E.g. – Salary, wages, profit from stocks or gains by selling goods.

Income distributions

Dividends, interest, and/or short-term capital gains paid to a mutual fund’s shareholders. Operating expenses are deducted from income before it is distributed to shareholders.

Income Tax

This is the tax levied directly on individual income from various sources including salaries.

Independent director

A fund director or trustee who does not have any significant business relationship with a mutual fund’s adviser or underwriter. An independent director better enables the fund board to provide an independent check on the fund’s management.

Index Fund

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. The fund holds the same stocks as the underlying index and in the same proportion as the index.

Index Futures/options

Contracts with underlying asset as indices.

Index mutual fund

A fund designed to track the performance of a market index. The fund’s portfolio of securities is either a replicate or a representative sample of the designated market index.

Indirect Taxes

Taxes such as Excise Duties and Custom Duties which are imposed on goods or services and not on income or profits.

Individual retirement account (IRA)

A tax-deferred account set up by or for an individual to hold and invest funds for retirement.

Inflation

A rise in general level of prices of goods and services over a period. Fall in purchasing power of currency over a time i.e. with same amount of money lesser number of same goods can be bought. E.g. – In year 2000, For Rs 4000, 10 grams of gold could be bought. Whereas, in 2008 only 3.5 grams of gold could be bought for Rs 4000. It is measured using various price indices.

Inflation

A rise in general level of prices of goods and services over a period. In other words, fall in purchasing power of currency over a time i.e. with same amount of money lesser number of same goods can be bought. It is measured using wholesale price index or consumer price index.

Inflation risk

The risk that the purchasing power of the future value of assets or income will be lower due to inflation.

Initial Public Offer (IPO)

Also referred as “Public Offering”, is first time sale of stock to public by a private or an unlisted company. It paves the way for listing and trading of issuer’s securities.IPO’s are used for long-term capital expansion by small and younger companies, but could also be offered by large, established companies for various business needs like infrastructure, project financing etc.

Institutional investor

The businesses, nonprofit organizations, and other similar investors who own funds and other securities on behalf of their organizations. This classification of investors differs from individual or household investors who own the majority of investment company assets.

Insurance

A contract or promise to protect an individual, a company or any other entity against a probable future loss in consideration of upfront payment called premium. In other words, compensation is contingent on a future event causing loss. Types of insurance – Life Insurance & Non-Life or General Insurance. E.g. – Financial stability caused due to death of an individual; Loss occurring due to fire in house or warehouse.

Interest rate risk

Risk of gain or loss on a security due to possible changes in interest-rate levels. When interest rates rise, the market value of a debt security will fall, and vice versa.

Internal Rate of Return (IRR)

The discount rate at which present value of cash inflows from a project exactly equals the present value of investment (s).

Intraday indicative value (IIV)

A real-time estimate of an exchange-traded fund’s (ETF) intraday value. Third-party providers calculate and disseminate this measure every 15 to 60 seconds during securities market trading hours.

Investment company

A corporation, trust, or partnership that invests pooled shareholder dollars in securities appropriate to the organization’s objective. Mutual funds, closed-end funds, unit investment trusts, and exchange-traded funds are the main types of SEC-registered investment companies.

Investment Objective

Desired result from the investments. It sets the rationale for the fund and base for an investor to align the personal goals and risk profile with the fund.

Investment objective

The goal (e.g., current income, long-term capital growth) that a mutual fund pursues on behalf of its investors.

Issuer

The company, municipality, or government agency that issues securities, such as stocks, bonds, or money market instruments.

J
Jensen’s alpha

A measure of the fund manager’s performance, Jensen’s Alpha is the difference of the average return of the fund over the predicted return using capital asset pricing model (CAPM), given the portfolio's beta and the average market return.  A positive value for Jensen's alpha means the fund is generating excess returns over expected returns for associated systematic risk.

Junk Bonds

Below investment grade bonds. High interest rate is the key feature but as they are offered by small or unknown firms they are the most risky debt class security.

K
Keogh

A tax-favored investment vehicle covering self-employed individuals, partners, and owners of unincorporated businesses; also called an H.R. 10 plan. These were first made available by Congress in 1962, but today operate under rules very similar to those for retirement plans for a corporation’s employees.

Key Information Memorandum (KIM)

An abridged offer document mainly consisting of facts on the mutual fund and its options. Usually, it is accompanied by an application from.

L
Liability

A binding obligation to settle a debt owned. It arises by transfer of an economic resource with a promise to settle over a period of time. Such obligations commonly arise due to business operations. E.g. – Creditors, Bonds Issued, Loans Taken.

Lifestyle fund

Mutual funds that maintain a predetermined risk level and generally use words such as “conservative,” “moderate,” or “aggressive” in their names to indicate the fund’s risk level. Also known as target risk fund.

Liquidity

The ability to gain ready access to invested money. Mutual funds are liquid because their shares can be redeemed for the next computed net asset value on any business day. In the money market, a security is said to be liquid if the spread between bid and ask prices is narrow and reasonably sized trades can take place at those quotes.

Listing

Acceptance of a qualifying security for traded through the exchange.

Lock-in Period

Period during which a unitholder is restricted from selling the units owned.

Long-term funds

A mutual fund industry designation for all funds other than money market funds. Long-term funds are broadly divided into equity (stock), bond, and hybrid funds.

Long-Term Liability

Debt is repayable over a period exceeding one year. Further classified as medium-term which extends for a period of 3-5 years and long-term which is payable over more than 5 years. E.g. – Secured Loans, Debentures.

Loss

Deficit in revenue to meet the business costs, expenses, interest on debts. Decrease in wealth of owners’ equity/investment due to business operations.

M
Management fee

The amount paid by a mutual fund to the investment adviser for its services.

Margin

A sum of money kept with the clearinghouse for buying or selling a futures contract as a security.

Mark-to-Market (MTM)

Process of revaluation of a futures contract on daily basis to settle the margin requirements as per the gains and losses.

Market Indices

A statistical measure to track the performance of a basket of stocks. The basket is considered to represent a sector or a market as a whole depending upon the objective of index so created.

Market Lot

The minimum number of shares in which a security can be traded on exchange.

Market Return (Rm)

Return yielded by leading market indicators/indices. E.g. – Return of SENSEX or NIFTY over 5 year period.

Maturity

The time until which the debt must be repaid. It could be expressed in years, months, weeks and days.

Maturity date

The date on which the debt agreement expires and debt is to be repaid in full on/by this date.

Minimum Alternate Tax (MAT)

If a company's tax liability is less than 10% of its profits, it has to pay a minimum alternate tax of 10% of the book profits.

Minimum Investment

The minimum amount a fund scheme requires for issuing units. It may differ from option to option. E.g. – Rs 5000 may be the minimum investment required to invest in fund as one time, but the SIP may be available for Rs 2000 for 12 months.

Minimum Order Quantity

The minimum number of shares for which an application must be made as per the class of investors.

Monetized Deficit

When government prints money to bridge the deficit, it is termed as monetized deficit. RBI usually provides this money as part of the Centre’s borrowing program.

Money Market

A market among banks to finance very short-term liquidity. Mostly for a day or two. It is also called overnight market.

MuniFund Term Preferred (MTP) shares

Exchange-listed closed-end fund preferred shares that have a fixed dividend rate set at the time of issuance. MTP shares have a mandatory redemption period (usually five years) unless they are redeemed or repurchased earlier by the fund. Unlike fixed-rate preferred stock previously issued, MTP shares were created for issuance by closed-end funds investing in municipal bonds.

Mutual fund

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

Mutual Fund Scheme

A mutual fund provides various plans and options to invest depending on the investor class and investor goals. Combination of these plans and options make a mutual fund scheme. E.g. – Reliance Energy Fund – Retail Plan – Dividend Pay-out.

N
National Debt

Total outstanding debt of the central government.

NAV

Net Asset Value is a Fund’s price per share (MF Unit). NAV per share is computed once a day based on the closing market prices of the securities in the fund's portfolio.

Net Worth

Excess of assets over liabilities is called net worth. Net Worth = Total Assets – External Liabilities. For and individual net worth and capital are same but for a corporate entity net worth can also be expressed as sum of capital and reserves and surplus.

New Fund Offer (NFO)

Corpus raising activity for a new fund to be launched by an asset management/fund company. It is first unit offering activity for a fund. Usually, during NFO the entry load on a scheme is waived off.

Non-Plan Expenditure

These expenses consist of Revenue and Capital Expenditure that does not fall under 5 year plan program.

Non-Tax Revenue

Revenues generated by means other than direct and indirect taxes. For example: interests on loans given to state governments or any public institutions, dividends and profits received from PSUs etc.

NOPAT

Profitability measure without considering the effect of leverage. I.e. profit earned assuming the company has no debt in capital structure thus, no tax advantage. It is a better measure of operating efficiency when compared to net income.

O
Offer Price

The price at which shares are offered for a sale by an issuer. In fixed price IPO it is known before the IPO opens for subscription.

Open-Ended Fund

An open-ended fund or scheme is one that is available for subscription even after NFO and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Over-The-counter (OTC) market

A decentrailsed system of security trading, where trades are executed directly by investors on phone, dealer network or any electronic system. No role of clearing and settlement houses if exists. Usually such market is found for the securities not listed on exchanges and therefore, also known as “off-board market” or “unlisted market”.

Oversubscription

Demand for number of shares greater than available for sale.

P
P/B Ratio

PB ratio is price to book value of a asset. The book value is derived by aggregating the book value of all the securities. The asset with low PB may indicate that the asset is available at a good price. However it may also mean that market is not willing to pay more because of its poor fundamentals.

Participatory Notes

The notes are issued to foreign investors interested to invest in Indian securities. The investment represents the share in particular Indian security. Commonly known as P-Note.

Pay-Back Period

Length of time required to recover the capital invested. E.g. – An investment of Rs 20,000 gives a cash inflow of Rs. 4000 for 10 Years. Payback period will be 20000/4000 = 5years.

Payroll deduction plan

An arrangement that some employers offer employees where employees can authorize their employer to deduct a specified amount from their salaries at stated times to buy mutual fund shares.

Pension

Periodic or a lump sum retirement benefit received from employer to an employee.

Per Capita Income

Per capita income or income per persona is obtained by dividing the national income of a country, or region by its population.

Plan Expenditure

Plan expenditure consists of both Revenue Expenditure and Capital Expenditure of the government on the Central Plan, Central Assistance to States and Union Territories.

Plan Outlay

The amount for expenditure on projects, schemes and programmes announced in the Plan. The money for the Plan Outlay is raised through budgetary support and internal and extra-budgetary resources.

Pooled investing

The basic concept behind mutual funds in which a fund aggregates the assets of investors who share common financial goals. A fund uses the pool assets to buy a diversified portfolio of investments, and each mutual fund share purchased represents ownership in all the fund’s underlying securities.

Portfolio

A group of various classes of assets/investments owned by an individual or organization.

Portfolio Beta

Weighted beta of the individual securities in a portfolio. It is a measure of how closely a portfolio is correlated to market movements.

Portfolio Return

Weighted average of returns generated individually by the securities in a portfolio.

Portfolio Turnover

Rate of trading activity in a portfolio. Measures how frequently securities are bought and sold in a portfolio. 100*(Minimum of purchase and sales) / (Average Assets). To adjust it to Annual Turnover Rate, multiply by M, i.e. 12/ [Lag between 2 holdings (in months)].

Portfolio turnover

A measure of the trading activity in a fund’s investment portfolio; how often securities are bought and sold by a fund.

Premium

Price Paid to buy an option contract.

Prepayment risk

The possibility that a bond owner will receive his or her principal investment back from the issuer prior to the bond’s maturity date.

Price Band

Range of price decided by an issuer for inviting bids from investors in a book building issue.

Price Earnings Growth (PEG)

Discounting price-earnings multiple by the growth in earnings per share. Lower the ratio better it is as it indicates less value to be paid per unit of growth.

Price To Earnings (P/E)

A ratio of current market price of the stock to the EPS of the company. It measures the expensiveness of the stock. Higher the ratio more expensive is the stock.

Primary Deficit

Primary Deficit is the Fiscal Deficit minus Interest payments on debts.

Primary Market

A Part of capital market for issuing new securities. The parties involved are issuer and investor. Companies, government or any other class of entity obtain financing in equity, debt or both forms of capital. The issuance is done through a syndicate of security dealers. Also known as.

Principal Amount

Sum or part of money borrowed; par/face value.

Private Company

A company which should have maximum 50 members and restricts rights to transfer of shares by its articles.

Profit

Surplus of revenue left after providing for all business costs, expenses and interest on debts to the owner of business. Increase in wealth of owners’ equity/investment due to business operations.

Profit After Tax (PAT)

Also known as Net Income or Bottom-line is measure of profitability for the owners of company. Is arrived after providing for all operating, non-operating whether cash or non-cash expenses, interest, depreciation and taxes from revenue.

Profit and Loss Account (P&L)

Summary of revenue, costs and expenses incurred in course of business over a period of time. Generally, time span is a quarter or a year. Reflects the operational management’s efficiency to generate profit.

Profit Before Tax (PBT) / Earnings Before Tax (EBT)

Earnings measure to avoid the changes tax laws bring in the profitability of the company. Is arrived at by deducting all expenses except tax from the revenue.

Promoters

The promoter has been defined as a person or persons or a company who are in over-all control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). It may be noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter.

Prospectus

The official document that describes an investment company to prospective investors. The prospectus contains information required by the SEC, such as investment objectives and policies, risks, services, and fees.

Provident Fund

A fund established to provide post-retirement saving with contribution from employer and employee during the job.

Public Account

Account where money received through transactions not relating to consolidated fund is kept.

Public Company

A company which has minimum 7 members and there is no limit for maximum number of members.

Public Debt

Total outstanding debt of the central government.

Put Option

An option under which buyer has a right but not the obligation to sell the underlying asset at strike price to the seller on/until a fixed date mutually agreed.

Putable Bonds

Bonds issued with a right vested with holder to get it before maturity. If holder is in a position to lend money at higher interest rate he might get the bonds redeem, issued at lower interest rates earlier.

Q
Qualified Institutional Buyer (QIB)

Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. E.g. – Public Financial Institutions, Foreign Institutional Investor (FII), Insurance companies, Mutual Funds, Commercial Banks, Venture Capital Company, Pension and Provident funds with stipulated fund requirements.

R
Real Rate of Return

Return arrived after reducing the nominal return by the rate of inflation during the same period. Real Rate of Return = Nominal Return - Inflation.

Red Herring Prospectus (RHP)

Prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.

Redemption price

The amount per share that mutual fund shareholders receive when they redeem.

Registrar and Transfer Agents (RTA)

The organisation appointed by the issuer to maintain the records of security holders and no. of securities held by them. A service transfer of securities from one holder to another and also facilitates dispatch of certificates and refunds/calls during the issue.

Reinvestment privilege

An option whereby shareholders may elect to use dividend and capital gains distributions to automatically buy additional fund shares.

REMAT

Also known as rematerialisation is a process of moving stock held under electronic system of book-keeping into physical certificate.

Retail individual investor

Means an investor, Individual, HUF or eligible Non-Resident Individual, who applies or bids for securities of smaller amount. Of not more than Rs.1, 00,000 in India.

Revenue Budget

A statement projecting Revenue Receipts and Revenue Expenditure of the government.

Revenue Deficit

Excees of Revenue Expenditure over Revenue Receipts .

Revenue Expenditure

Expenditure incurred for the normal functioning of the government departments and various other services. It includes but not limited to interest payment on debt, subsidies et al.

Revenue Receipt

Revenue receipts include proceeds from direct and indirect taxes levied by the government, interest and dividend earned on investments made by the government and other fee for services rendered by government.

Revenue Surplus

Excess of Revenue Receipts over Revenue Expenditure.

Revised Estimates

When actual figures are not expected to match Budget Estimates, revised estimates are given in the following budget.

Risk

Quantifying the chances of actual return being less than expected return from an investment.

Risk-Free Return (Rf)

Return earned on an investment which has no risk. Return on government securities qualify for this category of return.

Risk/Portfolio Variance

Weighted variance of the individual securities in a portfolio. It is a measure of portfolio risk.

S
Secondary Market

A market to resale the securities owned. Parties to the security are owner-to-owner or investor-to-investor. Issuer remains absent in transaction and is not affected with the total capital raised whether in form of equity or debt. Two mechanisms for trade are Over-The-counter (OTC) and through “Exchange”. Also known as aftermarket.

Securities Transaction Tax (STT)

Securities Transaction Tax (STT) is the tax payable on the value of securities traded through a recognized stock exchange.

SIP

An investment strategy where in a buyer purchases units of fund worth same amount at a regular interval. The concept is based on smoothening effect of volatility.

Sortino ratio

This is a measure of excess return per unit of risk based on downside semi-standard deviation, instead of total risk (the standard deviation of the portfolio) used by the Sharpe ratio. Since the Sortino ratio takes into account only the downside volatility, it measures the reward to negative volatility trade-off. A fund with higher Sortino ratio is expected to provide better returns for same negative volatility as compared to fund with lower ratio.

Statutory Liquidity Ratio

Commercials Banks are required to invest a portion of the deposits in gold or approved government securities before providing credit to the customers. This portion expressed as % of total deposits is called as Statutory Liquidity Ratio. SLR restricts the bank’s leverage in pumping more money into the economy and therefore used by RBI to control liquidity.

Stock Futures/options

Contracts with underlying asset as stocks.

Subscription

An agreement to purchase the number of security at a specified price.

Subsidies

Financial grant provided to individuals or a group of individuals with an aim to help them.

Surcharge

This is an extra charge over and above the normal tax and calculated on tax liability. For example: 10% additional surcharge on the tax liability means the person will have to shell out additional 10 Rs if his tax liability is Rs 100.

Surplus

Portion of income left after meeting all the expenses.

Switching

Moving the investment from one mutual fund scheme to another mutual fund scheme of same family of funds or if option provided in other families also.

SWP

Option available to mutual fund investor to withdraw units of an equal amount on a regular basis from the lump sum investment made earlier.

T
Treasury Bill (T-Bills )

These are short term debt securities with maturity of less than a year, backed by the government to meet short-term mismatches in receipts and expenditure.

Treynor ratio

A risk adjusted measure of return, the Treynor ratio measures the excess return of a fund for the systematic risk associated with it. The fund with higher Treynor Ratio will provide better return for the same systematic risk as compared to the fund with lower Treynor ratio.

Turnover Ratio

A measure of portfolio churning, the portfolio turnover ratio (PTR) is obtained by dividing its total sales or purchases (excluding cash), whichever is less, by its average monthly assets during the year. Higher churning indicates that fund manager was actively buying and selling the securities during the period. It will cause higher transaction cost which is not desirable unless superior asset selection yields benefits that offsets the transaction cost. Low PTR may mean that the transaction cost is lower but may also indicate the passive response of the fund manager to the dynamic investment scenario.

U
Under subscription

Demand for number of shares less than available for sale.

Underlying Asset

Asset which is to be bought or sold under any derivatives contract. E.g. – Stocks, Bonds, Commodities, Currencies, Indices, Interest Rates etc.

Unsecured Debt

A debt which is backed only by reputation or creditworthiness of the borrower. Lender is not secured against any non-payment, principal or interest, through a collateral security.

V
VAT

Taxes imposed only on the difference between the value of output and the value of inputs used to produce it and not on the entire input cost.

Vote On Account

It’s the another term for interim budget where the government presents accounts required to keep the process on until the next government takes over.

W
Ways And Means Advance (WMA)

These are the advances provided by RBI to manage temporary mismatches in receipts and payments of the center or states.

Wholesale Price Index

Also known as Headline Inflation in Indian context, the Wholesale Price Index or WPI measures and tracks the changes in prices of representative goods at the wholesale level. Inflation of 10% means that the value of WPI for a particular month went up by 10% as compared for same month a year earlier. Calculated by Central Statistics Office (CSO) under the Ministry of Statistics and Program Implementation (MOSPI), WPI is an important indicator which influences the fiscal and monetary policy decisions taken by government and RBI.

WPI - Wholesale Price Index

Also known as Headline Inflation in Indian context, the Wholesale Price Index or WPI measures and tracks the changes in prices of representative goods at the wholesale level. Inflation of 10% means that the value of WPI for a particular month went up by 10% as compared for same month a year earlier. Calculated by Central Statistics Office (CSO) under the Ministry of Statistics and Program Implementation (MOSPI), WPI is an important indicator which influences the fiscal and monetary policy decisions taken by government and RBI.

X
Y
Yield

The annual rate of return received in the form interest by investing in bonds, expressed as a percentage of the cost of the investment.

Yield to Maturity

The annual rate of return that an investor expects to receive if the bond is held until the maturity date.

Z