Glossary of Investment Terms

New to investing? Here’s a plain-language guide to the most common mutual fund and investment terms you’ll come across.

A

AUM (Assets Under Management) The total market value of all the investments that a mutual fund manages on behalf of its investors. A higher AUM generally indicates a fund that investors trust.

Asset Allocation The strategy of dividing your investment across different asset classes like equity, debt, and gold to balance risk and return based on your goals.

B

Benchmark A standard index (like Nifty 50 or Sensex) used to measure and compare the performance of a mutual fund. If your fund beats its benchmark, it’s performing well.

Blue Chip Fund A mutual fund that invests in large, well-established, and financially stable companies. These are generally lower risk and suitable for conservative investors.

C

CAGR (Compound Annual Growth Rate) The average annual growth rate of your investment over a period of time, accounting for compounding. It’s the most commonly used metric to compare fund performance.

Capital Gains The profit you earn when you sell your mutual fund units at a price higher than what you paid. It can be short-term or long-term depending on how long you held the investment.

D

Debt Fund A mutual fund that invests in fixed income securities like government bonds, corporate bonds, and treasury bills. Generally lower risk than equity funds.

Diversification Spreading your investment across multiple securities, sectors, or asset classes to reduce risk. The idea is that losses in one area may be offset by gains in another.

Dividend A portion of the fund’s earnings distributed to investors. Not all funds offer dividends; some reinvest profits back into the fund (growth option).

E

ELSS (Equity Linked Savings Scheme) A type of equity mutual fund that qualifies for tax deduction up to ₹1.5 lakh under Section 80C. It has a mandatory 3-year lock-in period — the shortest among all tax-saving instruments.

Equity Fund A mutual fund that primarily invests in stocks (shares) of companies. It offers higher potential returns but comes with higher risk.

Expense Ratio The annual fee charged by a mutual fund to manage your money, expressed as a percentage of your investment. A lower expense ratio means more of your money is working for you.

Example: An expense ratio of 1% means for every ₹10,000 invested, ₹100 goes towards fund management fees annually.

Exit Load A fee charged by the fund house when you redeem (withdraw) your investment before a specified period, usually 1 year. It is meant to discourage early withdrawals.

F

Folio Number A unique identification number assigned to you by a mutual fund house when you invest. Think of it like your account number with that fund house.

Fund Manager A qualified investment professional responsible for managing the mutual fund’s portfolio — deciding which securities to buy, hold, or sell.

Fund House (AMC) The Asset Management Company that creates and manages mutual funds. Examples include SBI Mutual Fund, HDFC Mutual Fund, and Mirae Asset.

G

Growth Option An investment option in a mutual fund where your returns are reinvested back into the fund rather than being paid out as dividends. Suitable for long-term wealth creation.

H

Hybrid Fund A mutual fund that invests in a mix of equity and debt instruments. It offers a balance between risk and return, suitable for moderate investors.

I

Index Fund A mutual fund that passively tracks a market index like the Nifty 50 or Sensex. It does not try to beat the market — it simply mirrors it. Generally has a lower expense ratio.

K

KYC (Know Your Customer) A mandatory one-time verification process required by SEBI before investing in mutual funds. It involves submitting identity and address proof (PAN, Aadhaar, etc.).

L

Large Cap Fund A mutual fund that invests primarily in the top 100 companies by market capitalisation. These are generally stable, well-known companies with lower volatility.

Liquidity How easily and quickly you can convert your mutual fund investment into cash. Most open-ended mutual funds offer high liquidity — you can redeem anytime.

Lock-in Period A fixed period during which you cannot withdraw your investment. ELSS funds have a 3-year lock-in. Most other mutual funds have no lock-in.

Lump Sum Investment Investing a large amount of money all at once, as opposed to spreading it out over time through a SIP.

M

Mid Cap Fund A mutual fund that invests in medium-sized companies (ranked 101–250 by market cap). These carry more risk than large cap funds but offer higher growth potential.

N

NAV (Net Asset Value) The price of one unit of a mutual fund. It is calculated daily based on the total value of the fund’s assets minus liabilities, divided by the number of units.

Example: If a fund’s NAV is ₹50 and you invest ₹5,000, you get 100 units.

NFO (New Fund Offer) When a mutual fund house launches a brand new fund and offers its units to the public for the first time, usually at an initial NAV of ₹10.

P

Portfolio The complete collection of all your mutual fund investments. A well-balanced portfolio includes funds across different categories based on your goals and risk appetite.

R

Redemption The process of selling your mutual fund units and getting back the money. The amount is based on the NAV on the day of redemption.

Risk-o-meter A standardised scale mandated by SEBI that rates a mutual fund’s risk level from Low to Very High. Always check this before investing.

S

SEBI (Securities and Exchange Board of India) The regulatory body that governs and oversees mutual funds and financial markets in India. All mutual funds must be registered with SEBI.

SIP (Systematic Investment Plan) A method of investing a fixed amount in a mutual fund at regular intervals (monthly, weekly). It encourages disciplined investing and averages out market volatility over time.

Small Cap Fund A mutual fund that invests in smaller companies (ranked 251 and below by market cap). These carry the highest risk but also have the potential for the highest returns over the long term.

STP (Systematic Transfer Plan) A plan where a fixed amount is automatically transferred from one mutual fund to another at regular intervals. Often used to gradually move money from debt to equity.

SWP (Systematic Withdrawal Plan) A plan where a fixed amount is automatically redeemed from your mutual fund at regular intervals. Useful for generating a regular income in retirement.

T

Total Returns The overall gain or loss from an investment, including both capital appreciation (growth in NAV) and any dividends received.

U

Units The individual portions of a mutual fund that you own. When you invest in a mutual fund, you are allotted units based on the current NAV.

X

XIRR (Extended Internal Rate of Return) A method to calculate actual returns on investments made at irregular intervals, like SIPs. It is more accurate than CAGR for evaluating SIP returns.

Didn’t find the term you were looking for? Contact us and we’ll add it to the glossary.