Finance terms simplified

Financial terms often intimidate us. But once you understand the terms they look simple. Read on for some investment terms simplified. Self-knowledge is always the key to good investment


SIP (Systematic Investment Plan)
In SIP an investor invests a fixed amount of money monthly or quarterly in a mutual fund. The investor is allocated a number of units according to the current NAV (Net Asset Value). Every time a sum is invested, more units are added to the investor’s account.
Instead of making one heavy investment it allows you to make small periodic investments. It is like a recurring deposit where you invest in a mutual fund without altering your financial liabilities.
IPO (Initial public offering)
Also colloquially called ‘going public’, IPO is a type of public offering in which shares of a company are made open to public; the owners of the company give up part of their ownership to stockholders and they transform from private to public company.
In simple words, IPO is a source of collecting money from the public for the first time in the market to fund its projects. In return, the company gives shares to the investors of the company.
NFO (New Fund Offers)
NFO is a security offering where investors may purchase units of a closed-end mutual fund. This offering, similar to a stocks’ initial public offering (IPO) allows the underlying company to raise capital for the purpose of buying securities. The difference being that for an NFO there is no past performance as it is a new fund.
Balanced Fund
A balanced fund combines a stock component, a bond component and sometimes a money market component in a single portfolio. It is a type of mutual fund that has a policy of diversifying shareholder assets between both stocks and bonds, providing a one-stop solution for those who want everything in a single package. These are ideal for investors looking to retire in the near future and have a moderate risk appetite.
Consolidated Account Statement (CAS)
Due to a recent amendment in SEBI regulations, Consolidated Account Statements are being issued which contains complete information of your portfolio in one statement.
It covers all schemes and mutual funds and can be viewed online. You can now request for a CAS across your entire holdings in mutual fund scheme services by Mutual Fund Registrars, CAMS, Karvy, FTAMIL and SBFS.
Mutual Fund
A mutual fund is a professionally-managed investment scheme. The number of units you purchase represents your share of holding in the particular scheme. The units can be purchased or redeemed at the fund’s current Net Asset Value (NAV). The NAVs fluctuate and so the investor also participates proportionally in the gain or loss of the fund.
All mutual funds are registered with SEBI with strict rules created to protect the interests of the investor.
Debt Fund
Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market.
Comparatively less volatile, a debt fund provides a steady but low income relative to equity. The main investing objectives of a debt fund are largely preservation of capital and generation of income.
ELSS (Equity Linked Savings Scheme)
These are tax-saving mutual funds that you can use to save income tax of up to Rs 1.5 lakh under Section 80C. ELSS funds have a lock-in period of 3 years and invest a majority of their portfolio in the stock market. Since these are equity mutual fund schemes which invest in stocks, invest in them only if you can handle the volatility in the stock market.
Equity Fund
An equity fund (also known as stock fund) is a mutual fund that invests principally in stocks. Stock mutual funds are principally categorised according to company size, the investment style of the holdings in the portfolio and geography.
AMC (Asset Management Company)
Asset management companies provide investors with more diversification and investing options than they would have by themselves. These companies charge service fees and they manage mutual funds, hedge funds and pension plans for clients.
NAV (Net Asset Value)
Net Asset Value is a fund’s market value per unit. It is calculated by dividing the total value of all the assets in a portfolio, minus all its liabilities. NAV is calculated at the end of every market day but it is advisable to look for annualised returns rather than daily returns while selecting a mutual fund for investment.
Mutual fund companies collect an amount from investors when they join or leave a scheme. This fee is generally referred to as a ‘load’. Entry load can be said to be the amount or fee charged from an investor while entering a scheme or joining the company as an investor.
Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or the company as an investor.