GLOSSARY OF MUTUAL FUNDS TERMS

Apr 02 - 08, 2007

MUTUAL FUND

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal by a professional money manager. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost

CLOSED-END FUND

A type of fund with a fixed number of shares. Shares of closed-end funds are bought and sold through an exchange like KSE, not through the company that manages the fund.

OPEN-END FUNDS

An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices through an AMCs. The key feature of open-end schemes is liquidity.

INCOME FUND

These funds primarily invest in assets that pay a fixed-Rupee amount e.g., bank deposits, treasury bills, term finance certificates and government bonds. The element of risk is low and so is the return.

GROWTH FUND

A diversified portfolio of stocks that has capital appreciation as its primary goal, and thereby invests in companies that reinvest their earnings into expansion, acquisitions, and/or research and development. Most growth funds offer higher potential growth but usually at a higher risk.

BALANCED FUND

A mutual fund that invests its assets into the money market, bonds, preferred stock, and common stock with the intention to provide both growth and income. Also known as an "Asset allocation fund". A balanced fund is geared towards investors looking for a mixture of safety, income, and capital appreciation. The amount the mutual fund invests into each asset class usually must remain within a set minimum and maximum.

INDEX FUND

A portfolio of investments that is weighted the same as a stock-exchange index in order to mirror its performance. This process is also referred to as "indexing". Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500.

OFFERING DOCUMENT

The prospectus, advertisement or other document (approved by SECP), which contains the investment and distribution policy and all other information in respect of the Unit Trust, as, required by the Rules and is circulated to invite offers by the public to invest in the Unit Trust.

NAV OR NET ASSET VALUE

A mutual fund's share price, computed by subtracting total liabilities from total assets and dividing by the number of shares outstanding.

REDEMPTION/ REPURCHASE PRICE

Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. This is also called Bid Price

OFFER/SALE PRICE

Its a price you pay when you invest in a scheme. It may include a sales load.

FRONT-END LOAD/SALES LOAD

A charge collected by a scheme when it sells the units. Also called, 'Front-end' load. An investor pays a fee upfront (usually, a percentage of the total investment).

BACK-END LOAD

A charge collected by a scheme when it buys back the units from the unit holders.

NO-LOAD

An investor pays no fee upfront, or in the future.

All mutual funds are subject to management expense ratios (MER). This is a fee charged by the fund company to cover the expenses for the management of the fund. It is accrued daily based on a percentage of the total value.

CERTIFICATE

The definitive certificate acknowledging the number of Units registered in the name of the Holder issued at the request of the Holder.

BETA

A measure of the volatility, or systematic risk of a security or a portfolio in comparison to the market as a whole.

SHARPE RATIO

A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns

STANDARD DEVIATION

A measure of dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk).

ALPHA

A measure of a mutual fund's risk relative to the market

SYSTEMATIC RISK

The risk inherent to the entire market or entire market segment. Also known as 'un-diversifiable risk' or 'market risk'.

MEAN

The simple mathematical average of a set of two or more numbers. The mean for a given set of numbers can be computed in more than one way, including the arithmetic mean method, which uses the sum of the numbers in the series, and the geometric mean method. However, all of the primary methods for computing a simple average of a normal number series produce the same approximate result most of the time.

TAX ON MUTUAL FUNDS

The impact of taxation on investor, investing directly or through mutual funds is neutral. Mutual funds distributing ninety percent of income as dividend are exempt from payment of income tax. The unit/ shareholders are subject to tax on dividend distribution by mutual funds at the applicable tax rates.

INITIAL PERIOD OR INITIAL OFFERING PERIOD (IPOS)

A period determined by the Management Company not exceeding ninety days during which Units will be offered at the Initial Price in terms of the Offering Document.

INITIAL PRICE

The price per Unit during the initial offering period determined by the Management Company.

DISTRIBUTOR/ DISTRIBUTION COMPANY

A company, firm or a Bank appointed by the Management Company and after intimation to the Trustee for performing the Distribution Function and shall also include the Management Company and the Trustee, subject to approval by the Management Company, if they perform the Distribution Function.

DIVERSIFICATION

A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.

CUSTODIAN

A bank, the Central Depository Company or any other Depository that for the time being may be appointed by the Trustee with the approval of the Management Company to hold and protect the Deposited Property or any part thereof as custodian on behalf of the Trustee.