Pure debt and hybrid Unit Trusts have different types of fixed income instruments in their portfolio with each of them having a maturity date. Average maturity refers to the average of the maturities of the entire debt instrument in the portfolio of the fund. Average maturity will give an idea about how sensitive the debt fund is to the changes in the interest rate. Fixed income instruments with longer maturity are more volatile than those with shorter maturity.

Asset allocation is an investment strategy which aims to spread investor's portfolio across several assets such as equities, bonds, gold and cash according to their age, goals, risk tolerance ability and investment horizon. Unit Trust schemes also follow this strategy, albeit as per their investment objective. For instance, a hybrid Unit Trust scheme such as balanced funds typically have an allocation up to 65% in equity, and the remaining in debt and cash equivalents. Investors can, thus, look at the asset allocation of a Unit Trust scheme and map it to their individual asset allocation.

Offer document of a Unit Trust scheme spells out all the details including investment objective, risk factors, sponsor's track record, educational qualification and work experience of key personnel. However, many of the details pertaining to the scheme may change, which is issued by the fund house in the form of addendum. These addendums and notices are available on the fund house website and also get published in the national dailies.

(1) Technically, arbitrage consists of purchasing a commodity or security in one market for immediate sale in another market (deterministic arbitrage).
(2) Popular usage has expanded the meaning of the term to include any activity which attempts to buy a relatively underpriced item and sell a similar, relatively overpriced item, expecting to profit when the prices resume a more appropriate theoretical or historical relationship (statistical arbitrage).
(3) In trading options, convertible securities, and futures, arbitrage techniques can be applied whenever a strategy involves buying and selling packages of related instruments.
(4) Risk arbitrage applies the principles of risk offset to mergers and other major corporate developments. The risk offsetting position(s) do not insulate the investor from certain event risks (such as termination of a merger agreement on the risk of completion of a transaction within a certain time) so that the arbitrage is incomplete.
(5) Tax arbitrage transactions are undertaken to share the benefit of differential tax rates or circumstances of two or more parties to a transaction.
(6) Regulatory arbitrage transactions are designed to provide indirect access to a risk management market where one party is denied direct access by law or regulation.
(7) Swap driven arbitrage transactions are motivated by the comparative advantages which swap counter-parties enjoy in different debt and currency markets. One counterparty may borrow at a relatively lower rate in the intermediate or long term United States dollar market, while the other may have a comparative advantage in floating rate sterling.

AUM or assets under management refers to the recent / updated cumulative market value of investments managed by a Unit Trust or any investment firm.

The best rated shares with the highest status as investment based on return, yield, safety, marketability and liquidity

A weak or falling market characterized by the dominance of sellers.

One hundredth of a percentage point. Basis points are used in currency and bond markets where the size of trades mean that large amounts of money can change hands on small price movements. Thus if the yield on a Treasury bill rose from 5.25% to 5.33% the change would have been eight basis points.

An accounting statement of a company’s assets and liabilities, provided for the benefit of shareholders and regulators. It gives a snapshot, at a specific point of time, of the assets that the company holds and how the assets have been financed.

Funds which aim to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents.

Beta is a measure of an investment's volatility vis-a-vis the market. Beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 implies that the security's price will be more volatile than the market.

A group of securities, usually a market index, whose performance is used as a standard or benchmark to measure investment performance of Unit Trusts, among other investments. Some typical benchmarks include the Nifty, Sensex, BSE200, BSE500, 10-Year Gsec.

While investing in debt funds, investors should gauge the credit quality of the instruments in the portfolio. The credit rating of the instruments indicates the level of default risk. The higher the rating, the safer is the instrument. To check this, investors can go through the offer document and the fact sheets published by fund houses. Generally, a debt fund invests in several instruments, ranging from risk-free government securities to high-risk corporate papers. A fund that has invested a large corpus in a poor quality paper may find it difficult to sell this paper in the market, thereby putting the investor's money at risk. As the safety of capital is of utmost importance to debt investors, they should not opt for funds with a large proportion of low quality investments.

CAS refers to a single account statement which combines the transactions in all folios of an investor across all the Unit Trust schemes/ fund houses. SEC has mandated all asset management companies to ensure that a CAS will be issued every month to investors in whose folios transactions have taken place during the month. CAS is issued for those folios which have a) financial transactions in a month and, b) identical unit holders (identified by a valid PAN). Further, in December 2012, AMFI launched CAS in the electronic form-'eCAS'-replacing the paper statements.

It is the return of a fund from one point to the other after factoring in the time for holding investments. It gives an idea about the value of investment during its tenure. While investments usually do not grow at a constant rate, the compound annual return smoothens out returns by assuming constant growth. For example, an investment of K5,000 over a five-year period has grown to K6,500 and given absolute returns of 30%, which is very high, but the gains are over five years and, hence, the CAGR is 5.38% obtained in the following manner - ((6500/5000) ^ (1/5))-1. CAGR calculates the growth rate of investment per annum by considering the compounding effect.

The interest rate stated on the face of coupon.

Payment made to shareholders, usually once or twice a year out of a company’s profit after tax. Dividend payments do not distribute the entire net profit of a company, a part or substantial part of which is held back as reserves for the company’s expansion. Dividend is declared on the face value or par value of a share, and not on its market price.

When a security is quoted at a price below its nominal or face value, it is said to be at a discount.

Spreading the risk by constructing a portfolio that contains many different investments whose returns are relatively uncorrelated. Thus, risk levels can be reduced without a corresponding reduction in returns

(1) A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; (2) A contract which derives its value from the prices, or index or prices, of underlying securities

Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures.

Redemption Fee is charged at the time an investor redeems the units of a Unit Trust. 

Purchase Fee is charged at the time an investor purchases the units of a Unit Trust.

The date on or after which the buyer of a security is not entitled to the dividend already declared.

The ownership interest in a company of holders of its common and preferred stock.

An employee of the asset management company such as a Unit Trust or life insurer, who manages investments of the scheme. He is usually part of a larger team of fund managers and research analysts.

Unit trusts or Unit Trusts which invest with the objective of achieving mostly capital growth rather than income. Growth funds are mostly more volatile than conservative income or money market funds because managers invest on shares or property that are subject to larger price movements

Fund that invests exclusively in government securities.

The holdings or the portfolio is a Unit Trust's latest or updated reported statement of investments/securities. These are usually displayed in terms of percentage to net assets or the rupee value or both. The objective is to give investors an idea of where their money is being invested by the fund manager.

A Unit Trust which invests in a portfolio of shares that matches identically the constituents of a well-known stock market index. Hence changes in the value of the fund mirror changes in the index itself.

Organisations that invest, including insurance companies, depository institutions, pension funds, investment companies, and endowment funds.

The excess or abnormal returns earned by the Unit Trust portfolio compared to its benchmark. A positive alpha on the investment implies that the fund has performed better than expected, given its beta. A negative alpha indicates that the fund has underperformed.

Commonly referred to as KYC, it is a term used for the client identification process by Unit Trusts, banks, insurance companies, etc. In the case of Unit Trusts, market regulator Securities and Exchange Commission of Zambia (SEC) has prescribed certain requirements relating to KYC norms. This is in the form of verification of identity, address, providing information of financial status, occupation and other demographic information. An applicant must be KYC compliant to invest in a SEC registered Unit Trust. Investors can download KYC forms from websites of Unit Trusts, Investors need to provide proof of identity like a NRC (National Registration Card) card copy, passport copy, driving license copy, etc. and proof of address.

Any claim for money against the assets of a company, such as bills of creditors, income tax payable, debenture redemption, interest on secured and unsecured loans, etc. Although on balance sheet shareholder’s equity is shown under liability, it has no claim on the assets of a company, unless it goes into liquidation.

Modified duration is the price sensitivity and the percentage change in price for a unit change in yield

This is the minimum investment amount for an existing investor in a Unit Trust scheme.

Net asset value or NAV is the most commonly associated word with Unit Trusts and widely used by investors while buying and selling Unit Trust units. NAV of a Unit Trust is the market value of the assets of the scheme minus its liabilities. It is calculated by dividing the value of net assets by the outstanding number of units. In simple words, NAV is the value of each unit of a particular Unit Trust scheme on any given business day. It varies day to day as the market value of securities changes every day. NAV helps in determining the price at which an investor can purchase or sell Unit Trust units. Just as investors look at stock prices to find out how their equity investment is performing, a Unit Trust investor can keep track of the schemes by looking at the NAV per unit. However, NAV has nothing to do with the future performance of the fund. It is simply the price of a unit of the fund on a particular day.

The investment objective and underlying investments determine the nature of the Unit Trust scheme. For instance, a Unit Trust that aims at generating capital appreciation by investing in stock markets is an equity fund or growth fund. Likewise, a Unit Trust that aims at capital preservation by investing in debt markets is a debt fund or income fund. Each of these categories may have sub-categories.

The aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written of.

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis.

The ratio of the market price of the share to earnings per share. This measure is used by investment experts to compare the relative merits of a number of securities.

If an investor buys a security for a price above its eventual value at maturity, he has paid a premium for it.

Owners of this kind of stock are entitled to a fixed dividend to be paid regularly before dividend can 58 be paid on common stock. They also exercise claims to assets, in the event of liquidation, senior to holders of common stock but junior to bondholders. Holders of preferred stock normally do not have a voice management.

A collection of securities owned by an individual or an institution (such as a Unit Trust) that may include stocks, bonds and money market securities.

Unit Trusts invest in securities after evaluating their creditworthiness as disclosed by the ratings. A depiction of the Unit Trust in various investments based on their ratings becomes the rating profile of the fund. Typically, this is a feature of debt funds.

A date on which the records of a company are closed for the purpose of determining the stockholders to whom dividends, proxy’s rights etc are to be sent.

This term is used to gauge the correlation between the Unit Trust scheme and the benchmark index measured in the range of 0 to 100. R-squared of 100 means that the Unit Trust moves in tandem with the benchmark index and R-squared of 0 means least correlation.

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

The Sharpe Ratio, named after its founder, the Nobel Laureate William Sharpe, is a measure of risk-adjusted returns. It is calculated using standard deviation and excess return to determine reward per unit of risk.

Standard deviation is a statistical measure of the range of an investment's performance. When a Unit Trust has a high standard deviation, its means its range of performance is wide, implying greater volatility.

Systematic Investment Plan (SIP) works on the principle of making periodic investments of a fixed sum. It works similar to a recurring bank deposit. For instance, an investor may opt for an SIP that invests K250 every 15th of the month in an equity fund for a period of three years.

Systematic withdrawal plan helps investors to redeem a fixed amount of their investments from their Unit Trusts on a pre-determined frequency. The amount withdrawn can be used to meet planned and unplanned expenses as well as to re-invest according to an individual's life stage / asset allocation plan. SWPs ensure one receives the amount in parts rather than the whole so that the spending is planned effectively and are also more tax efficient in case of withdrawals from debt oriented Unit Trusts in comparison to dividend options and bank FDs.

Systematic transfer plan allows investors to transfer the pre-defined amount on a specified date from one particular scheme to another by giving one-time instruction to the fund house. STP is a useful tool to take a step-by-step exposure to equities or to reduce exposure over a period of time. Investors sometimes want to withdraw their money from the equity MF scheme and transfer it systematically to a debt scheme or a money market scheme of the fund house or vice versa.

Legal custodian who looks after all the monies invested in a unit trust or Unit Trust.

When using an indexing or any other benchmarking strategy, the amount by which the performance of the portfolio differed from that of the benchmark.

Unit Trusts offer an optional feature that gets automatically activated (through an alert) on the occurrence of a pre-defined event. This facility allows an investor to fix a date, NAV or the index level at which he/she can enter or exit a fund or switch to another fund. Investors can choose a one-time trigger (deactivated once the action is complete) or opt for repetitive triggers wherein the fund house will continue to make the pre-described changes. There are different types of triggers such as NAV, index-based, time-based, capital appreciation/depreciation, entry trigger etc.

A variant of the Sharpe Ratio, this measures the risk-adjusted performance for each unit of dispersion measured by beta (i.e. market risk). This ratio is similar to the Sharpe Ratio, only it uses beta as the volatility measurement. The ratio divides the difference of the average return of a fund and the risk-free rate by beta (market risk) of the fund.

Apart from risks and returns, investors must look at the costs involved while investing in Unit Trusts. Though these costs are a small component, they can knock down investors' earnings especially if a scheme does not perform well. TER is an annual charge on AUM in percentage terms and is calculated as (total expenses during an accounting period) * 100 / total net assets of the fund. The ratio includes investment management and advisory fees, sales/agent commissions and ongoing service fees, legal and audit fees, registrar and transfer agent fees, fund administration expenses, and marketing and selling expenses. The NAV of a Unit Trust scheme is net of all liabilities including TER and, hence, a lower TER results in higher returns and vice versa. Investors must invest in a scheme which charges a lower TER compared to peers as higher expenses reduce returns of the fund.

One who does underwriting. A financial organization that handles sales of new securities which a company or municipality wishes to sell in order to raise money. Typically, the underwriters will guarantee subscription to securities say, an issue of equity from the company at a stated price, and are under an obligation to purchase securities up to the amount they have underwritten, should the public not subscribe for the issue.

Volatility equates to the variability of returns from an investment. It is an acceptable substitute for risk; the greater the volatility, the greater is the risk that an investment will not turn out as hoped because its market price happens to be on the downswing of a bounce at the time that it needs to be cashed in. The problem is that future volatility is hard to predict and measures of past volatility can, themselves, be variable, depending on how frequently returns are measured (weekly or monthly, for example) and for how long. Therefore, putting expectations of future volatility into predictive models is of limited use, but resorting to using past levels of volatility is equally limited.

The Yield to Maturity or the YTM is the rate of return anticipated on a bond if held until maturity. YTM is expressed as an annual rate. The YTM factors in the bond's current market price, par value, coupon interest rate and time to maturity.

A bond that pays no interest while the investor holds it. It is sold originally at a substantial discount from its eventual maturity value, paying the investor its full face value when it comes due, with the difference between what he paid initially and what he finally collected representing the interest he would have received over the years it was held.