Glossary for Key Financial Terms V1.0

Author: Ravi Ranjan

Contents A ................................................................................................................................................................ 2

B ................................................................................................................................................................ 3

C ................................................................................................................................................................ 5

D ................................................................................................................................................................ 7

E ................................................................................................................................................................ 9

F ............................................................................................................................................................... 10

G .............................................................................................................................................................. 11

H .............................................................................................................................................................. 12

I ............................................................................................................................................................... 12

L ............................................................................................................................................................... 14

M ............................................................................................................................................................. 14

N .............................................................................................................................................................. 15

O .............................................................................................................................................................. 16

P .............................................................................................................................................................. 17

R .............................................................................................................................................................. 18

S ............................................................................................................................................................... 20

T .............................................................................................................................................................. 21

U .............................................................................................................................................................. 22

V .............................................................................................................................................................. 22

W ............................................................................................................................................................. 23

Y .............................................................................................................................................................. 23

Z............................................................................................................................................................... 23

References .............................................................................................................................................. 24

A

Abandonment value- Abandonment value is the equivalent cash value of a project if it is liquidated immediately after reducing all debts which need to be repaid. It is also known as liquidation value of an asset. The general rule for deciding to discontinue the product is that if the product's salvage value is greater than the net present value (NPV) of its expected cash flows, the project is abandoned. It is important for companies to know the profitability of a project and if it is not profitable it is better to discontinue the same. It is an important factor in bankruptcy filings where assets are generally sold at a discount.

Abnormal rate of return- Abnormal rate of return or 'alpha' is the return generated by a given stock or portfolio over a period of time which is higher than the return generated by its benchmark or the expected rate of return. It is a measure of performance on a risk-adjusted basis. It is the return generated by a security or a portfolio which is in excess of its benchmark or the return predicted by an equilibrium model such as capital asset pricing model (CAPM). Abnormal rate of return can either be positive or negative depending on how the security or a fund has performed in comparison to its benchmark.

Account statement- A document similar to a bank account statement that indicates the mutual fund units owned. A statement is issued each time the investor carries out a transaction.

Accounts payable- a record of all short-term (less than 12 months) invoices, bills and other liabilities yet to be paid. Examples of accounts payable include invoices for goods or services, bills for utilities and tax payments due.

Accounts receivable- a record of all short-term (less than 12 months) expected payments, from customers that have already received the goods/services but are yet to pay. These types of customers are called debtors and are generally invoiced by a business.

Accounts receivable finance- see Factoring. Accrual accounting- an accounting system that records transactions at the time

they occur, whether the payment is made now or in the future. Amortization- the process of expensing for intangible assets such as goodwill

and intellectual property over a period of time. See also Depreciation. Annual report- A write-up given to shareholders containing the yearly record of

a mutual fund's performance. The report also informs the investor about the fund's earnings and operations. Reports are sent out yearly.

Annual Return- The percentage of change in net asset value over a year's time, assuming reinvestment of distribution such as dividend payment and bonuses.

Annualized Returns- Absolute returns over a period (which could be larger or smaller than a year) aggregated to a period of one year.

Applicable NAV- NAV at which a transaction is affected. A cut-off time is set by the fund and all investments or redemptions are processed at that particular NAV. This NAV is relevant if the application is received before that cut-off time on a day. A different NAV holds if received thereafter.

Appreciation- An increase in an investment's value.

Application Form- Form prescribed for investors to make applications for subscribing to the units of a fund.

Assets- are things you own. Assets are a resource of money value such as stocks, bonds, real estate and cash. These can be cash or something that can be converted into cash such as property, vehicles, equipment and inventory.

Asset class- Different types of investments such as stocks, bonds, real estate and cash.

Asset Management Company (AMC)- The trustee delegates the task of floating schemes and managing the collected money to a company of professionals, usually experts who are known for smart stock picks. This is an asset management company (AMC). AMC charges a fee for the services it renders to the MF trust. Thus the AMC acts as the investment manager of the trust under the broad supervision and direction of the trustees. The AMC must have a net worth of at least Rs10 crores at all times and it cannot act as a trustee of any other mutual fund.

Asset Allocations- Allocation of the portfolio of a mutual fund in various categories of assets such as equity, debt and others on the basis of the investment objective of the scheme. The process of diversifying investments among different types of assets like stocks, bonds and cash in order to optimize risk / return tradeoff based on a person's financial situation and goals.

Audit- a physical checks performed by an auditor or tax official on a business' financial records to check that everything is accounted for correctly.

Automatic Investment Plan- Periodic investment of a fixed amount by a unitholder, either directly from his bank account or by issuing post-dated cheques, in his mutual fund account.

Automatic Withdrawal Plan- Allows an investor to receive periodic payments of fixed amount or units from his investment in a mutual fund scheme. Retirees who want a regular income supplement often choose this.

Average Maturity- Average time to maturity of all fixed-period investments in the portfolio of a scheme.

Average Portfolio Maturity- The average maturity of all the bonds in a bond fund's portfolio.

B

Bad debts- money owed to you that is unlikely to be paid to you in the foreseeable future.

Balance sheet- a snapshot of a business as of a particular date. It lists all of a business' assets and liabilities and works out the net assets.

Balanced funds- A mutual fund scheme with an investment objective of both long-term growth and income, through investment in stocks and bonds. Generally 60% is invested in stocks and 40% in bonds, in order to obtain the highest returns consistent with a low risk strategy.

Balloon payment- a final lump sum payment due on a loan agreement. Loans with a larger final 'balloon payment' have lower regular repayments over the term of the loan.

Bank reconciliation- a cross-check that ensures the amounts recorded in the cashbook match the relevant bank statements.

Bankrupt- an individual is bankrupt when they cannot pay their debts and aren't able to reach an agreement with their creditors.

Bankruptcy- a process where an individual is legally declared bankrupt and their assets and financial affairs are administered by an appointed trustee.

Basis Point (BP)- The smallest measure used in quoting yields on fixed income securities. One basis point is one percent of one percent, or 0.01%.

Bear market- A period of time during which securities prices are falling in the stock market.

Benchmark- A standard used for comparison. Usually to provide a point of reference for evaluating a fund's performance. The common benchmarks for equity-oriented funds are the BSE 200 index or the BSE Sensex.

Benchmarking- the process of comparing your business to similar businesses in your industry.

Beta- A measure of a fund's volatility in relation to the stock market, as measured by a stated index. By definition, the beta of the stated index is 1; a fund with a higher beta has been more volatile than the market, and a fund with a lower beta has been less volatile than the market. Based on past historical records, a beta higher than 1.0 indicates that when the market rises, the stock will rise to a greater extent than that of the market; likewise, when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that the stock will usually change to a lesser extent than that of the market. The higher the beta, the greater the investment risks.

Bill of sale- a legal document used in the purchase of property or other assets that details what was purchased, where the purchase took place, and for how much.

Blue chip- Stock of a nationally known company that has a long record of profit, growth, and dividend payment, and a reputation for quality management, products, and services.

Bonds- A debt security or IOU issued by a government entity or corporation, which generally pays a stated rate of interest, and plans to return the principal amount of the loan on the maturity date. Unlike stockholders, bondholders do not have corporate ownership privileges.

Bookkeeping- the process of recording the financial transactions of a business. Bootstrapping- where a business funds growth purely through personal

finances and revenue from the business. Bottom line- see Net profit. Bottom-Up- An investment strategy that first seeks individual companies with

attractive investment potential, then considers the economic and industry trends affecting those companies.

Break-even point- the exact point when a business' income equals a business' expenses.

Broker- A broker is a licensed person authorized to receive commissions. Brokers are always affiliated with a brokerage company, or broker-dealer network. He is basically a salesman who sells stocks, bonds, or mutual funds.

Budget- a listing of planned revenue and expenditure for a given period. Bull market- A distinctive time period, during which the prices of securities are

rising, usually characterized by high trading volumes.

C

Call money- Money, which is, loaned in the call market, which can be demanded for repayment on call, which basically means immediately. The term call money is also known as money at short notice as it is repayable in 24 hours. It is also traded in the money market.

Call Risk- The risk that bonds will be redeemed (or "called") before maturity. This possibility increases during periods of falling interest rates.

Capital- wealth in the form of money or property owned by a business. Capital cost- a one-off substantial purchase of physical items such as plant,

equipment, building or land. Capital Appreciation- An increase in the value of an investment, measured by

the increase in a fund unit's value from the time of purchase to the time of redemption.

Capital Market- A market where debt or equity securities are traded. Capital gains/losses- Net profit or losses from the sale of securities in the fund's

portfolio. Short-term gains or losses are generated on securities held one year or less; long-term gains or losses pertain to securities held for more than one year.

Capital growth- an increase in the value of an asset. Cash- includes all money that is available on demand including bank notes and

coins, petty cash, certain cheques, and money in savings or debit accounts. Cash accounting- an accounting system that records transactions at the time

money is actually received or paid. Cash book- a daily record of all cash, credit or cheques transactions received or

paid out by a business. Cash flow- the measure of actual cash flowing in and out of a business. Cash incoming- money that is flowing into the business. Cash outgoing- money that is flowing out of the business. Certificate of Deposit (CD) - Short-term debt instrument issued by scheduled

commercial banks excluding regional rural banks. They are unsecured instruments that mature between three months to one year.

Chart of accounts- an index of the accounts a business will use to classify transactions. Each account represents a type of transaction such as Asset, Liability, Owner's equity, Income, and Expense.

Chattel mortgage- is similar to a hire-purchase agreement although the business owns the asset from the start. Chattel mortgages require regular ongoing payments and typically provide the option of reducing the payments through the use of a final 'balloon' payment.

Close-ended schemes- Schemes, which have a fixed date of redemption.

Closed-end scheme/fund- A type of fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed-

end funds do not stand ready to issue and redeem shares on a continuous basis. Price is determined by supply and demand.

Closing price- The price of a security after the final trade at the end of the day. Collateral- see Security. Collection Center- Locations where application forms are accepted by funds. Commercial bill- (also known as a bill of exchange) is a form of commercial loan

that can be offered on an interest only basis, or reducing basis. Commercial bills typically require some sort of security and suit short-term funding needs such as inventory.

Commercial paper- They are short-term unsecured instruments issued by a company that needs to raise money; and is willing to pay an interest rate. These are included in portfolios of some mutual funds. Such instruments have maturities ranging from 3 months to 1 year.

Contingent liability- a liability that only needs to be paid if a particular event or circumstance occurs.

Corpus- The total amount of money invested by all the investors in a scheme. Commission- A fee charged by a broker or distributor for his or her service in

the buying or selling of securities. Commodity- A commodity is a product which trades on a commodity exchange.

Examples of these are food, metal or another physical substance that investors buy and sell which also includes foreign currencies and financial instruments and indices

Compounding- Interest earned not only on the initially invested principal but also on accumulated interest during the period.

Consumer Price Index- The index compiled by a governmental agency which follows the cost of living by following the changes in price of basic goods and services over time. This index measures inflation.

Contingent Deferred Sales Charge (CDSC)- A type of exit sales load which is charged when units are redeemed within a specific time period following their purchase. These charges reduce the longer the units are held.

Cost of goods sold- the total direct costs of producing a good or delivering a service.

Coupon Rate- The interest rate that the issuer of a bond agrees to pay the bond-holder until maturity of the bond.

Credit- a lending term used when a customer purchases a good or service with an agreement to pay at a later date (e.g. an account with a supplier, a store credit card or a bank credit card).

Creditor- a person or business that allows you to purchase a good or service with an agreement to pay at a later date. A creditor is also anyone who you owe money to, such as a lender or supplier.

Credit limit- a dollar amount that cannot be exceeded on a credit card or the maximum lending amount offered for a loan.

Credit analysis- The process of analyzing information on companies and bonds in order to estimate whether the issuer will meet with its future obligations to pay out.

Credit rating- A measure indicating the bond issuer's credit worthiness, or his/ her ability to repay the loan. The bonds are rated by an independent rating agency such as CRISIL, ICRA, and CARE.

Credit Risk- The possibility that a bond issuer will default, and fail to repay principal or interest as promised. Also known as "default risk".

Credit history- a report detailing an individual's or businesses past credit arrangements. A credit history is often sought by a lender when assessing a loan application.

Crowd funding- Is a way of financing your business idea through donations of money from the public. This is usually done online, through a crowd funding website.

Current asset- an asset in cash or that can be converted into cash within the next 12 months.

Current liability- a liability that is due for payment in the next 12 months. Custodian- The keeper of a fund's securities and other assets. Cut off Time- In respect of all mutual funds regulated by SEBI, fresh

subscriptions and redemptions are processed at a particular NAV. Every fund specifies a cut-off time in respect of fresh subscriptions and redemption of units. All requests received before the cut-off times are processed at that day's NAV and thereafter at the next day's NAV.

Cumulative total return- Usually calculated in the same manner as standardized average annual total return, except that these figures represent the total change in value of an investment over the stated periods and do not reflect any sales charges.

Current assets- Assets that can be converted to cash within a year. Current liabilities- Liabilities that must be paid within a year. Currency Risk- The possibility that fluctuating currency exchange rates will

affect the rupee value of an investment. Cyclical stocks- Stocks which rise and fall in price with the state of the

economy, in such industries as construction, automobile, engineering or those affected by the international economy such as shipping, aviation, and tourism. Cyclical stocks are also stocks which are affected by the natural environment such as fertilizers and tea. Examples of non-cyclical stocks would be drugs, insurance, basic foodstuffs and many other consumer products.

D

Debit- in double-entry bookkeeping a debit is an entry made on the left hand side of a journal or ledger representing an asset or expense.

Debt- any amount that is owed including bills, loan repayments and income tax. Debt consolidation- the process of combining several loans or other debts into

one for the purposes of obtaining a lower interest rate or reducing fees. Debt finance- money provided by an external lender, such as a bank or building

society.

Debt funds/ securities- A general term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, T-notes, T-bills and money market instruments are debt securities, but they vary in maturities.

Debtor- a person or business that owes you money. Debtors finance- See Factoring. Debentures- Instruments of debt, usually unsecured. They are also usually

credit rated. Default- a failure to pay a loan or other debt obligation. Depreciation- the process of expensing an asset over a period of time. An asset

is depreciated to spread the cost of the asset over its useful life. Derivative- Financial instrument whose value is based on the value of another

underlying security. Discount- Refers to the selling price of a bond when it's price is below its

maturity value. Disbursements- money that is paid out by a business. Discount- a reduction applied to a full priced good or service. See also

Markdown. Distributive bargaining- Distributive bargaining is a competitive bargaining

strategy in which one party gains only if the other party loses something. It is used as a negotiation strategy to distribute fixed resources such as money, resources, assets, etc. between both the parties. The ultimate aim, under distributive bargaining approach, is not to come to a win-win kind of situation but that one side wins as much they can. Both parties will try to get the maximum share from the asset or resource which needs to be distributed. We end up using distributive bargaining approach in our daily lives as well when we shop. Usually distributive bargaining approach works well with products which do not have a fixed price.

Distribution- Pay out to shareholders resulting from a mutual fund's realized capital gains, interest, or dividend income. A mutual fund dividend, or distribution, may be physically paid to the investor, or it may be reinvested in the fund, giving the investor more shares.

Dividend- Portion of profits that a company or a mutual fund distributes to its shareholders or unit holders.

Dividend Reinvestment- In a dividend reinvestment plan, the dividend is reinvested in the scheme itself. Hence instead of receiving dividend, the unit holders receive units. Thus the number of units allotted under the dividend reinvestment plan would be the dividend declared divided by the ex-dividend NAV.

Dividend Warrant- An instrument issued by companies/ mutual funds to an investor for the purpose of payment of dividends

Diversification- The investment strategy which spreads investments among securities in different industries, with different risk levels, and in different companies, potentially lowering risk by reducing the impact of any one security. Mutual funds are the best method of diversification because their portfolios consist of a variety of securities, unless otherwise noted. Mutual funds are a diversified investment by nature.

Double-entry bookkeeping- is a bookkeeping method that records each transaction in two accounts, both as a debit and a credit.

Drawings- personal expenses paid for from a business account. Drip pricing- Is when one price is presented at the beginning of an online

shopping experience and gradually, incremental fees and charges are added (or 'dripped') as you progress, for example, when buying a plane ticket. Drip pricing can result in the customer paying a higher price for a service or product than they first thought. As a business owner, you are required to show fees and charges at the beginning of an online shopping process and not gradually add them in.

Due diligence- Due diligence is the process of examining all the material facts of a contract or a deal before a legal contract is signed by both the parties. Put differently, it could also mean verifying the accuracy of a statement. The term, due diligence can be used in a lot of contexts, but it is generally used in reference to business transactions (mostly mergers and acquisitions, joint venture, project finance, securitization, etc.). The scope of due diligence typically depends on the nature of transaction proposed to be undertaken. It is not limited to buyers, but even sellers can perform a due diligence on the buyer.

Duration- Duration is a measure of a bond's lifetime that accounts for the size and timing of the bond's cash flows. Generally, the shorter the duration, the lower the price volatility, all other things being equal.

E

Earnings (per share)- The net income for a company during a specific period. It is calculated by subtracting the cost of sales, operating expenses and taxes from revenues, for a specific time period. It is the reason corporations exist and often the single most important determinant of a stock's price.

Employee share schemes- An employee share scheme (ESS) is where you give your employees the opportunity to buy shares in your company. It is also known as an 'employee share purchase plan' or an 'employee equity scheme'.

Encumbered- an encumbered asset is one that is currently being used as security or collateral for a loan.

Entry load- The load on purchases after the Initial (Public) Offer. Equity- A type of security representing part ownership in a company/

corporation. Common stocks, preferred stock, and convertible stock are types of equity securities, but debt securities are not, as they do not represent ownership.

Equity finance- is money provided to a business in exchange for part ownership of the business. This can be money invested by the business owners, friends, family, or investors like business angels and venture capitalists.

Equity Schemes- A scheme that invests primarily in stocks while seeking to provide relatively high long-term growth of capital.

Excise duty- an indirect tax levied on certain types of goods produced or manufactured in Australia including petrol, alcohol, tobacco and coal.

Exit load- The load on redemption other than the Contingent Deferred Sales Charge (CDSC) permitted under SEBI Regulations. A fee charged by some funds for redeeming or buying back fund shares. The amount sometimes

depends on how long the investment was held, so the longer the time period, the smaller the charge.

Ex-Dividend Date- The date following the record date for a scheme. When a fund's net asset value reduces by an amount equal to a dividend distribution.

Expense Ratio- A fund's operating expenses, expressed as a percentage of its average net assets.

Ex-Dividend or Ex Distribution- The date when the dividend is deducted from assets of a fund i.e. from the NAV.

F

Facility- a predetermined arrangement such as an account offered by a financial institution to a business (e.g. a bank account, a short-term loan or overdraft).

Factoring- (also known as debtors finance and accounts receivable finance) — is when a factor company buys a business' outstanding invoices at a discount. The factor company then chases up the debtors. Factoring is a way to get quick access to cash, but can be quite expensive compared to traditional financing options.

Face value- The value printed on the face of a stock, bond or other financial instrument or document.

Family of Schemes- A set of schemes with different investment objectives from a single asset management company usually allowing investors to "switch" their investments from one scheme to another at a no charge or a nominal charge.

FCNR- a Fully Convertible Non-Rupee account that can be opened for funds coming in from abroad or from local funds. The funds in the account are held in a foreign currency.

Finance- money used to fund a business or high value purchase. Financial year- a twelve month period typically from 1 July to 30 June. Financial statement- a summary of a business' financial position for a given

period. Financial statements can include a profit & loss, balance sheet and cash flow statement.

Fixed asset- a physical asset or long-term asset that will not be converted to cash within a year such as a house or a plot of land.

Fixed cost- a cost that cannot be directly attributed to the production of a good or service.

Fixed deposit- An investment instrument where you invest a fixed amount of money for a fixed period of time at a fixed rate of interest.

Fixed income funds/ securities- A security that pays a certain rate of return such as a bond but do not offer an investor much potential for growth. This usually refers to government, corporate or municipal bonds, which pay a fixed rate of interest until the bonds mature, or preferred stock, which pays a fixed dividend. A mutual fund investing in these types of securities may also be referred to as a fixed-income investment or security.

Fixed interest rate- when the interest rate of a loan remains the same for the term of the loan or an agreed timeframe.

Fixed Income Security- A security that pays a fixed rate of interest such as a "bond" but do not offer an investor much potential for growth.

Float- is when a private company offers shares in the company to the public for the first time. See Initial public offering.

Floating rate- An interest rate, which is periodically adjusted, usually based on a standard market rate outside the control of the institution. These rates often have a specified floor and ceiling, which limit the floating rate. The opposite of having a floating rate is having a fixed rate.

Floor- A lower limit for a price, interest rate, or other numerical factor. The price at which a stop order is activated (an order to buy or sell at the market when a definite price is reached either above (for a buy) or below (for a sell) the price that prevailed when the order was given). Also the area of a stock exchange where active trading occurs.

Forecast- a prediction of future financial transactions. Forecasts are often used to help plan a more accurate budget.

Foreign Institutional Investor (FII)- FII means an institution established or incorporated outside India which proposes to make investment in India in securities and is registered with SEBI.

Fringe benefits- non-monetary benefits such as company cars and mobile phones, included as part of a salary package.

Front-end load- A one-off charge that an investor must pay at the time the units of the scheme are bought

Fully drawn advance- is a long term loan with the option to fix the interest rate for a period. These loans are usually secured and can be used to fund a new business or equipment.

Fund- A mutual fund is a trust under the Indian Trust Act. Each fund manages one or more schemes.

Fund Category- Classification of a scheme depending on the type of assets in which the mutual fund company invests the corpus. It could be a growth, debt, balanced, gilt or liquid scheme

Fund Family- All the schemes, which are managed by one mutual fund. Fund Management Costs- The charge levied by an AMC on a mutual fund for

managing their funds. Fund Manager- The person who makes all the final decisions regarding

investments of a scheme

G

Gilts- A type of government security. Government securities- Securities that are sold to the public by the

government, for example, bonds. Goodwill- an intangible asset that represents the value of a business' reputation. Gross income- the total money earned by a business before expenses are

deducted. Gross profit- (also known as net sales) the difference between sales and the

direct cost of making the sales.

Growth funds- Mutual funds with a primary investment objective of long-term growth of capital. Unlike income, which is somewhat regular and consistent in most cases, growth is much less certain. Growth investments, however, usually outpace the returns on income investments over the long-term (five to ten years, or longer). It invests mainly in common stocks with significant growth potential.

Growth investing- A style of investing that invests in fundamentally sound businesses with the belief that they will go up in price. The stocks in this portfolio are well researched, liquid and of high quality and will usually give you a high P/E ratio and lower dividend yields in comparison to the market.

Growth scheme- A scheme where investments are made in equity and convertible debentures. The objective is to provide capital appreciation over a period of time.

Guarantor- a person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.

Guaranteed Returns- The return assured by the mutual funds as a minimum return in certain income plans.

H

Hire-purchase- a type of finance contract where a good is purchased through an initial deposit and then rented while the good is paid off in instalments plus interest charges. Once the good is fully paid the ownership of the good transfers to the purchaser. See also Rent to buy.

Holdings- The possessions or securities in an investor’s portfolio.

I

Inception date- The end of a scheme's initial offering period and the start of the scheme's formation.

Income funds- A fund whose primary objective is current income in the form of interest or dividends. Mutual funds that invest primarily in fixed income securities are called income funds.

Index- A benchmark against which the performance of a scheme is measured. Usually, equity fund use BSE 30 or BSE 200 as the benchmark. For fixed-income funds it is a bond index. The benchmark index must consist of securities similar to which the scheme invests in.

Indexing- An investment strategy that consists of the construction of a portfolio of stocks. It is designed to track the total return performance of an index of stocks.

Indexation- The central government specifies an index linked to the wholesale price index. The indices of two years (year of purchase and the year of sale) are used for the purpose of computing capital gains tax. The purchase price is multiplied by the index of the year of sale and the product is divided by the index of the year of purchase. This benefit is available only if the security has been held for more than 12 months. On sale of equity-oriented mutual fund schemes,

one can opt for paying tax at the rate of a flat 10% or go in for paying 20% after taking the benefit of indexation.

Index Fund- A fund that tries to mirror the performance of an index by investing in securities making up that index. (Note: it is not possible for investors to actually invest in the actual index, such as the BSE 30). This is a passive management style which normally results in lower management fees. Index funds are expected to provide a rate of return over time that will approximate or match, but not exceed, that of the market which they are mirroring.

Inflation risk- The possibility that the value of assets or income will be eroded by inflation affecting the purchasing power of a currency. Often mentioned in relation to fixed income funds as they may minimize the possibility of losing principal.

Initial public offering (IPO) - when a company first offers shares on the stock market to sell them to the general public. Also known as floating on the stock market.

Insolvent- a business or company is insolvent when they cannot pay their debts as and when they fall due.

Intangible assets- non-physical assets with no fixed value, such as goodwill and intellectual property rights.

Interest- the cost of borrowing money on a loan or earned on an interest-bearing account.

Interest rate- a percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate. Rates may be fixed or variable.

Interest rate risk- The risk that a security's value will change due to an increase or decrease in interest rates. A bond's price will always drop as interest rates rise and when interest rates fall, a bond's price will rise.

Inventory- an itemized list of goods or materials a business is holding for sale. Investment- an asset purchased for the purpose of earning money such as

shares or property. Investment Objective- The stated purpose or goal of a security's operations.

This term often determines the types of investments the security makes, the results expected, and the level of risk with which it is associated.

Investment Grade- High quality bonds that are rated AAA or higher by a rating agency. Investment grade bonds are considered safe. However, the higher the bonds rating, the lower the interest it offers.

Invoice- a document provided to a customer to request payment for a good/service received.

Invoice finance- is finance offered based on the strength of a business' accounts receivable. This form of financing is similar to factoring, except that the invoices or accounts receivables remain with the business. See also Factoring.

Issue- A security made available to the public. Mutual funds issue shares to investors in return for cash.

L

Liability- a financial obligation or amount owed. The claims of investors who have loaned to a company. The debts of a company.

Line of credit- an agreement allowing a borrower the ability to withdraw money from an account up to an approved limit.

Liquidate- to quickly sell all the assets of a company quickly and convert them into cash.

Liquidation- the process of winding up an insolvent company. An appointed administrator will do this by ceasing business operations, selling assets, and paying creditors and shareholders.

Liquidity- how quickly assets can be converted into cash. The ease with which an asset can be converted to cash. Mutual fund units are generally considered highly liquid investments as they can be sold on any business day at their current net asset value.

Liquid Funds /Money Market Funds- Funds investing only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit. The objective is to provide liquidity and preserve the capital

Loan- a finance agreement where a business borrows money from a lender and pays it back in instalments (plus interest) within a specified period of time.

Load fund- A mutual fund that charges an extra sales fee on top of the other fees. Loads do not mean a fund is managed better. There are two types of loads; front-end, charged at the time of purchase and back-end, charged at the time of redemption.

Loan to value ratio (LVR) - your loan amount shown as a percentage of the market value of the property or asset that will be purchased. The ratio helps a lender work out if the loan amount can be recouped in the event a loan goes into default.

Lock in Period- The period after investment in fresh units during which the investor cannot redeem the units.

M

Management Fee- The amount a scheme pays to its asset management company for its services. Typically, a certain percentage of assets under management. A fund's management fee is listed in its offer document. SEBI restricts this to 2.50% p.a. in equity funds and 2.25% p.a. for equity funds.

Margin- the difference between the selling price of a good or service and the profit. Margin is generally worked out as a gross margin percentage which shows the proportion of profit for each sales dollar. See also Mark up.

Margin call- when the value of a property or asset falls below a certain LVR. For higher risk loans such as margin loans, the lender will request further payment to bring the LVR back to the agreed percentage. See also Loan to value ratio (LVR).

Mark down- a discount applied to a product during a promotion/sale for the purposes of attracting sales or for shifting surplus/discontinued products. See also Discount.

Mark up- the amount added to the cost price of goods, to help determine a selling price. Essentially it is the difference between the cost of the good/service and the selling price, but it does not take into account what proportion of the amount is profit. See also Margin.

Market risk- The potential loss that is possible as a result of short-term volatility of the stock market, indicated by beta. Owning mutual funds shields an investor to some market risk that a stockholder may be vulnerable to because of their diversification.

Market Timing- Attempting to time the purchase and sale of securities or mutual fund units to coincide with market conditions

Maturity date- when a loan's term ends and all outstanding principal and interest payments are due.

Maturity value- The amount the issuer agrees to pay out when the bond reaches its maturity date.

Money market funds- A mutual fund that invests in short-term government securities, certificates of deposit and other highly liquid securities such as T- bills and short-term commercial paper, and generally pays money market rates of interest. An investment in a money market fund is neither insured nor guaranteed by the government or by any other entity or institution, so there is no assurance that the share price will be maintained.

Money Market Instruments- Commercial paper, treasury bills, GOI securities with an unexpired maturity up to one year, call money, certificates of deposit and any other instrument specified by the Reserve Bank of India.

Municipal bond fund- A mutual fund consisting of bonds issued by a state, city, or local government entity. The interest these securities pay is generally passed through to shareholders free of tax.

Mutual fund- A Mutual Fund is a common pool of money from numerous investors who wish to save money. Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those. Mutual funds offer investors the advantages of diversification, professional management, affordability, liquidity and convenience.

N

Net Asset Value- Market value of one share of a mutual fund on a given day; also known as the bid price. Unlike the public offering price, the NAV includes no sales charges. The NAV is calculated each day by taking the closing market value of all securities owned by a mutual fund, plus all other assets (e.g. cash), and deducting the fund's liabilities. This sum is then divided by the fund's total number of shares outstanding.

Net income- the total money earned by a business after tax and other deductions are taken out.

Net Profit- (also known as your bottom line) is the total gross profit minus all business expenses.

Net Worth- The value found by subtracting total liabilities from total assets. Net profit margin- A measure of a company's profitability and efficiency

calculated by dividing a measure of net profits (operating profit minus depreciation and income taxes) by sales.

No Load Fund- A fund that sells its units to investors without a sales load/charge.

NRE- a Non-Resident External Rupee account that NRIs can open with any Indian bank. They can use this account for making investments in India on a repatriable basis.

NRI- a Non-Resident Indian who is an Indian citizen or a person of Indian origin but who resides abroad. NRIs have to follow specific rules when investing in India.

NRO- an Ordinary Non-Resident Rupee account which can be opened for funds coming in from abroad or from local funds. The amount in the account is, however, non-repatriable.

O

Offering price- The price at which mutual fund shares are offered for sale to the public. Also known as offering price. The public offering price represents the net asset value plus any applicable initial sales charges.

Offer Document / Prospectus- A legal document that describes a mutual fund scheme. It contains information required by the Securities and Exchange Board of India explaining the offer, including the terms, issuer, objectives, historical financial statements.

Open book management- Open book management (OBM) is defined as empowering every employee of an organization with required knowledge about the processes, adequate training and powers to make decisions which would help them in running a business. It is all about team work and moving forward collectively. It involves keeping complete transparency with employees, sharing data, training employees to embrace leadership roles as well as sharing financial statement

Open-Ended Scheme- A scheme where investors can buy and redeem their units on any business day. Its units are not listed on any stock exchange but are bought from and sold to the mutual fund.

Operating Expenses- The day-today costs a mutual fund incurs in conducting business, such as for maintaining offices, staff, and equipment. These expenses are paid from the fund's assets before any earnings are distributed.

Opening NAV- the NAV disclosed by the fund for the first time after the closure of an IPO.

Overdraft facility- a finance arrangement where a lender allows a business to withdraw more than the balance of an account.

Overdrawn account- a credit account that has exceeded its credit limit or a bank account that has had more than the remaining balance withdrawn.

Overheads- the fixed costs associated with operating a business such as rent, marketing, utilities and administrative costs. See also fixed costs.

Owner's equity- See Net assets.

P

Performance- How a fund has done in the past and how well it is doing at present. Past performance is often used to get an idea of future performance; however, past performance does not guarantee future performance will be the same.

Personal Property- covers any property someone can own, except for land, buildings and fixtures. Examples include goods, plant and equipment, cars, boats, planes, livestock and more.

Personal Property Security Register (PPSR) - the PPSR replaces a number of registers of security interests and provides a single national noticeboard of security interests in personal property.

Petty cash- cash for the purposes of small miscellaneous purchases such as postage.

Plant and equipment- a group of fixed assets used in the operation of a business such as furniture, machinery, fit-out, vehicles, computers and tools.

Portfolio- A pool of individual investments owned by an investor or mutual fund. Portfolios may include a combination of stocks, bonds, and money market instruments. A list of the fund's current portfolio will usually be contained in a mutual fund's annual report.

Prospectus- An offer document by which a mutual fund invites the public for subscribing to the units of a scheme. This document contains information about the scheme and the AMC so as to enable a prospective investor make an informed decision.

Preferred stock- a type of capital stock whose holders are paid dividends at a specified rate. It has preference over common stock in the payment of dividends and the liquidation of assets, but does not ordinarily carry voting rights. The benefits of owning preferred stock are realized if the company ever goes bankrupt. If this occurs, preferred stock shareholders receive their money first. General (also known as common) stockholders may not receive any money, if none is remaining after paying preferred stock holders.

Principal- the original amount borrowed on a loan or the remainder of the original borrowed amount that is still owing (excluding the interest portion of the amount).

Price-earnings ratio (P/E) - One of the benchmarks used by portfolio managers to help them value companies. It is calculated by dividing a company's share price by its earning per share.

Price of Units- Price offered by a mutual fund for repurchase or sale of a unit on a daily basis.

Profit- the total revenue a business earns minus the total expenses. See also Revenue.

Profit and loss statement- (also known as an income statement) is a financial statement listing sales and expenses and is used to work out the gross and net profit of a business.

Profit margin- see Margin. Projection- see Forecast. Promissory note- A document signed by the borrower in which he promises to

repay a loan under agreed-upon terms. Public Offering Price (POP) - The price at which mutual fund shares are offered

for sale to the public. Also known as offering price. The public offering price represents the net asset value plus any applicable initial sales charges.

R

Rate of return- Rate of return is calculated by subtracting the purchase value by the present value and then dividing it by the purchase value. For equities, we often include dividends with the present value.

R&D- Stands for 'research and development'. Businesses conduct research and development to innovate, create new products and find better ways of doing things.

RBI- Reserve Bank of India established under the Reserve Bank of India Act, 1934.

Return- The sum of the income of a fund plus its capital gains. Real return- The rate of return earned on an investment after adjusting for the

rate of inflation during the time the investment was held. Receipt- a document provided to a customer to confirm payment and to confirm

a good/service has been received. Record keeping- the process of keeping or recording information that explain

certain business transactions. Record keeping is a requirement under tax law. Record Date- The date by which mutual fund holders are registered as unit

owners to receive any future dividend or capital gains distribution. Redeem- Cashing in units by selling them back to the mutual fund. Redemption of Units- buying back/cancellation of the units by a fund on an on-

going basis or on maturity of a scheme. The investor is paid a consideration linked to the NAV of the scheme.

Redemption load- A fee charged by some funds for redeeming or buying back fund shares. The amount sometimes depends on how long the investment was held, so the longer the time period, the smaller the charge.

Redemption price- The price at which a mutual fund's units are redeemed or bought back by a fund. The redemption price is usually equal to the current net asset value per unit and less the exit load if applicable.

Refinance- when a new loan is taken out to pay off an existing one. Refinancing is often done to extend the original loan over a longer period of time, reduce fees or interest rates, switch banks, or move from a fixed to variable loan.

Refund- The act of returning money to an investor by the fund. This could be on account of rejection of an application to subscribe units or in response to an application made by the investor to the fund to redeem units held by him.

Registrar or Transfer Agent- The institution that maintains a registry of unitholders of a fund and their unit ownership. Normally the registrar also distributes dividends and provides periodic statements to unitholders.

Rent to buy- is a type of finance arrangement where a good is purchased through an initial deposit and then 'leased' while the good is paid off. Once the good is fully paid the purchaser has the option (but no obligation) to buy the good or continue leasing. See also Hire purchase.

Repatriable- The return from abroad of the financial assets of an organization or individual, and the conversion of foreign currency to Rupees.

Repossess- the process of a bank or other lender taking ownership of property/assets for the purpose of paying off a loan in default.

Retention of title- a type of clause that can be included in contracts where a buyer may physically receive property, but doesn’t take legal ownership from the seller until the full purchase price is paid.

Return on investment (ROI) - a calculation that works out how efficient a business is at generating profit from the original equity provided by the owners/shareholders. It's a way of thinking about the benefit (return) of the money you've invested into the business. To calculate ROI, divide the gain (net profit) of the investment by the cost of the investment- the ROI is expressed as a percentage or a ratio.

(Net profit) / (Cost) x 100 = ROI

Example: Annie buys $1000 worth of stocks and sells the stocks a year later for

$1500. The net profit is $500. Return on Investment = (500 / 1000) = 0.5 x 100 =

50%. Annie's ROI on the stocks is 50%.

Revenue- (also known as turnover) the amount earned before expenses, tax and other deductions are taken out.

Risk- In general, risk is the possibility of suffering loss. There are many types of risk, such as credit risk, principal risk, inflation risk, interest rate risk, and investment risk. If you are prepared to accept greater risk, you have the chance of earning higher returns or profits on your money. Low-risk investments, while generally safer, do not usually produce a high return, hence the loss of potential gain.

Risk/ reward trade-off- The compromise made between high- and low-risk investments. High-risk investments generally generate more earnings, while low-risk ones generate a lower rate of return.

Risk tolerance- The willingness of an investor to tolerate the risk of losing money for the potential to make money.

Rupee Cost Averaging- An investment strategy based on investing equal amounts in a fund at regular intervals. Because more shares are bought when prices are low and fewer shares when prices are high, the average cost of your shares may be lower than the average price over the period you bought them. Rupee cost averaging cannot guarantee a profit or protect against loss in declining markets.

S

Sale price- The price at which a fund offers to sell one unit of its scheme to investors. This NAV is grossed up with the entry load applicable, if any.

Sales charge- A charge added on to the price of a mutual fund when you buy it. Scam- a deliberate and targeted deception designed to obtain money or

information unlawfully. Scheme- A mutual fund can launch more than one scheme. With different

schemes, in spite of there being a common trust, the assets contributed by the unit holders of a particular scheme are maintained and managed separately from other schemes and any profit/loss from the assets accrue only to the unit holders of that scheme

Scheme Objective- The purpose statement consisting of the goal and the avenues of investment released by the fund.

SEBI- Securities and Exchange Board of India established under Securities and Exchange Board of India Act, 1992.

Securities- The holdings of a mutual fund, such as stocks or bonds. Stocks are securities representing ownership shares. Bonds are securities representing a contractual debt obligation of the issuer to repay the holder, with interest.

Security- (also known as Collateral) is property or assets that a lender can take possession of, in the event that a loan cannot be repaid.

Sector Fund- A fund that invests primarily in securities of companies engaged in a specific industry. Sector funds entail more risk, but may offer greater potential returns than funds that diversify their portfolios.

Settlement Date- The date by which a transaction must be settled, that is, to make the payment of funds and the delivery of securities.

Shareholder (or stockholder)- The owner of shares of stock. Shares- Units of ownership in a corporation. In a mutual fund, the value of each

unit is calculated by dividing net assets by the number of shares. Shareholder's equity- see Net assets. Single-entry bookkeeping- a bookkeeping method used within a cash

accounting system and records one side of each transaction. SMSF- Stands for self-managed superannuation fund. An SMSF is a way of

saving for your retirement. Unlike other super funds, an SMSF is self-managed, which means you're responsible for making sure the super fund complies with super and tax laws.

Standard Deviation- A measure of the degree to which a fund's return varies from the average of the scheme's own return.

Stock Fund- A fund that invests primarily in stocks. Stock- the actual goods or materials a business currently has on hand. OR, a

share of stock represents ownership, or equity, in a corporation. When a company needs money to grow and expand, it may sell part of its ownership to the public in the form of shares (stock). In exchange for the money received from the sale, the company gives shareholders a portion of its future profits, as well as a measure of its decision-making power. These securities generally have the

most potential for capital appreciation, but their rights are subordinated in the event of a company liquidation or bankruptcy.

Stocktaking- a regular process involving a physical count of merchandise and supplies actually held by a business, completed to verify stock records and accounts.

S & P 500 stocks (Standard & Poor's Composite Index of 500 stocks) - Market value-weighted index that measures stock market price movements, based on the aggregate performance of 500 widely held common stocks.

Stocks- Sector Fund or Specialty Fund- It concentrates its holdings in a specific industry such as health care, energy, insurance, leisure.

Superannuation- money set aside for retirement that must be paid into a complying superannuation fund.

Switching- Transferring your investment from one scheme to another. An investor may want to switch due to changing market conditions.

Systematic Withdrawal Plan (SWP)/Recurring withdrawal facility (RWF) - A plan offered with some schemes under which post-dated cheques for fixed amounts (as may be fixed by the fund) are issued to the investors for monthly, bi-monthly or quarterly withdrawals. The withdrawals are as per the requirements of the investor specified by him/ her at the time of investment.

Systematic Investment Plan (SIP)/ Recurring investment facility (RIF) - A program that allows an investor to provide post-dated cheques to the mutual fund to allot fresh units at specified intervals (usually monthly or quarterly). On the specified dates, the cheques are realized by the mutual fund and additional units at the prevailing NAV are allotted to the investor. This enables him to invest as little as Rs 1000 a month and take advantage of rupee cost averaging.

Systematic Transfer Program (STP) - A plan that allows the investor to give a mandate to the fund to periodically and systematically transfer a certain amount from one scheme to another.

T

Tax invoice- an invoice required for the supply of goods or services over a certain price. A valid tax invoice is required when claiming GST credits. See also Invoice.

Tax Deducted at Source (TDS) - No tax is withheld or deducted at source, where any income is credited or paid by a mutual fund, as per the provisions of Section 194K and 196A of the Act.

Top-down investing- The top-down style of investment management places primary importance on country or regional allocation. Top-down managers generally focus on global economic and political trends in selecting the countries or regions where they expect to find investment opportunities. Only then do they employ a more fundamental analysis of individual stocks in order to make their final selections.

Total return- Return on an investment over a specified period of time, which includes share-price appreciation, reinvested dividends or interest, and any capital gains.

Total Assets Under Management- The market value of the total investments of a fund as on a particular date

Transaction costs- The costs incurred by the buying and selling of securities including broker commissions and the difference between dealer buying and selling price.

Treasury bills (T-bills) - A short-term security with a maturity of one year or less.

Treasury bonds (T-bonds) - A long-term debt instrument with a maturity of 10 years or longer.

Treasury notes (T-notes) - A certificate representing an intermediate-term loan to the government with a maturity between two to ten years.

Transfer Agent- A firm employed by a mutual fund to maintain unitholder records, including purchases, sales, and account balances.

Treasury bill (T-bill) - A debt security issued by the Indian government, having a maturity of less than a year.

Turnover Rate- Based on the corpus, it is the number of times at which the fund buys and sells securities each year.

Trustee- A person or a group of persons having an overall supervisory authority over the fund managers. They ensure that the managers keep to the trust deed that the unit prices are calculated correctly and the assets of the funds are held safely.

Time Horizon- The period of time one can stay invested (eg. number of years to retirement). Longer time horizons can reduce volatility risk.

Turnover- See Revenue.

U

Unit- The interest of the investors in either of the Schemes, which consists of each Unit representing one undivided share in the assets of the Schemes.

Unit Holder- A person who holds Unit(s) under a Mutual Fund. Unrealized Gain or Loss- Increase or decrease in the prices of securities held

by the fund.

V

Variable interest rate- when the interest rate of a loan changes with market conditions for the duration of the loan.

Variable cost- a cost that changes depending on the number of goods produced or the demand for the products/service.

Value investing- The investment approach which favours buying under-priced stocks that have the potential to perform well and increase in price in the future.It first seeks individual companies with attractive investment potential, then considers the economic and industry trends affecting those companies. Value managers usually begin their search with fundamental analysis, in order to find

companies whose current prices may fail to reflect their potential longer-term value.

Venture Capital- capital invested in a start-up business that is thought to have excellent growth prospects but does not have access to capital markets because it is a private company.

Volatility- The tendency of an investment or market to rise or fall sharply in price within a short-term period. Volatility is measured by beta.

W

Working capital- the cash available to a business for day to day expenses.

Y

Year to Date (YTD)- A time period in a calendar year starting from the first of January and ending on the first of January.

Yield to Maturity (YTM) - The yield earned by a bond if it is held until its maturity date.

Yield- The annual rate of return on an investment usually expressed as a percentage.

Yield Curve- A graph depicting yield vis-a-vis maturity. If short-term rates are lower than long-term rates, it is a positive yield curve, if short-term rates are higher; it is a negative or inverted yield curve. If there isn’t much difference, it is a flat yield curve.

Z

Zero coupon bond- A bond that is sold at a fraction of its face value. It does not, however, provide periodic interest payments but pays principal upon maturity.

References

http://www.business.gov.au/business-topics/tax-finance-insurance/business-

finances/Pages/glossary-of-financial-terms.aspx

http://economictimes.indiatimes.com/definition/category/Finance

http://www.dspblackrock.com/resources/Glossary.aspx