Pooled Investment Products and Principles of Investment Risks

Vocabulary practice flashcards covering pooled investment products, mutual funds, ETFs, ETNs, UITs, and principles of investment risks and statistical risk metrics.

Mutual Fund

A vehicle to mobilize moneys from investors to invest in different markets and securities in line with agreed-upon investment objectives, allowing small investors access to professional fund management.

Open-Ended Fund

A mutual fund scheme structured without a fixed maturity date that is open for ongoing purchase and repurchase on a perpetual basis, causing its unit capital to change regularly.

Close-Ended Fund

A mutual fund scheme that operates for a fixed maturity period where investors can only buy units directly from the fund during the NFO; post-NFO liquidity is provided through compulsory listing on a stock exchange.

Interval Fund

A hybrid scheme structure that is largely close-ended but opens for subscription and redemption at pre-specified intervals called transaction periods.

Transaction Period (Interval Fund)

The pre-specified period during which an interval scheme becomes open-ended for subscription and redemption, having a minimum duration of 2 days.

Interval Period

The period between the close of one transaction period and the opening of the next transaction period in an interval fund, with a maximum allowable duration of 15 days.

Entry Load

A sales charge added to the Net Asset Value (NAV) when an investor buys units of a mutual fund scheme, making the purchase price higher than the NAV.

Exit Load

A fee deducted from the Net Asset Value (NAV) when an investor withdraws or repurchases from a mutual fund scheme within a specified time frame, making the repurchase price lower than the NAV.

Rupee Cost Averaging (RCA)

An investment strategy where a fixed monetary amount is invested at regular intervals, automatically acquiring more units when market prices are low and fewer units when prices are high.

Value Averaging (VA)

An investment strategy where an investor predetermines a portfolio value growth target for each period and adjusts the investment amount periodically to meet that target value.

Equity Linked Savings Scheme (ELSS)

An open-ended equity scheme with a statutory lock-in period of 3 years that offers tax deductions on subscriptions up to Rs. 150,000 in a financial year under tax laws.

Portfolio Turnover Ratio

A ratio calculated as the value of purchase and sale of securities during a period divided by the average size of net assets of the scheme, indicating how frequently a portfolio is churned.

Asset Management Company (AMC)

The operating firm appointed by mutual fund trustees and approved by SEBI that handles the day-to-day operations and investment management of mutual fund schemes, requiring a minimum net worth of Rs. 50 crore.

Custodian

An independent entity registered with SEBI and appointed by the trustees to maintain physical and electronic custody of a fund's portfolio assets and settle its securities transactions.

Exchange-Traded Fund (ETF)

An investment product designed to replicate the performance of an underlying index that trades like a common stock throughout the trading day with intraday pricing.

Tracking Error (ETF)

The divergence in performance between an Exchange-Traded Fund and the underlying benchmark index it seeks to replicate, commonly arising from sample index-based construction or cash drag.

Exchange-Traded Note (ETN)

A senior unsecured debt security issued by a large banking institution that tracks a benchmark index and trades like a stock without owning any underlying physical securities.

Unit Investment Trust (UIT)

A registered investment company that issues redeemable units for a fixed, professionally selected portfolio of securities held without active trading until an established termination date.

Separately Managed Account (SMA)

An individual investment account managed by a professional investment manager where the client directly owns the underlying securities, allowing customizable portfolios and tax-loss harvesting.

Systematic Risk

The market-wide risk inherent in holding a broad class or type of assets and liabilities that cannot be eliminated through diversification.

Non-systematic Risk

Unique, firm-specific, or industry-specific risk (such as business, management, or financial risk) that can be eliminated or reduced through diversification.

Market Risk

A systematic risk characterized by the tendency of security prices to rise or fall together across the broader market, largely irrespective of individual company fundamentals.

Interest-Rate Risk

The risk that changes in market interest rates will adversely impact fixed-income security prices, causing the market value of existing bonds to drop when interest rates rise.

Inflation Risk

Also known as purchasing power risk, it is the risk that future inflation will erode the purchasing power of an investment's cash flows or returns over time.

Currency Risk

Also known as exchange rate risk, it is the risk of financial loss resulting from fluctuations in the relative exchange values when converting between currencies.

Endogenous Risk

Financial risk generated by shocks originating within the financial system itself, where internal participants perceive distress and their amplified reactions create heightened market volatility.

Exogenous Risk

Financial risk originating outside the financial system driven by news and unanticipated shifts in economic fundamentals that lead investors to reassess a security's intrinsic value.

Liquidity Risk

The risk reflecting the inability to quickly sell or buy an asset at a transaction price equal to or very close to its true underlying value.

Marketability

The measure of whether an active, open trading market exists allowing an asset to be quickly bought and sold.

Call Risk

The risk that a callable debt security will be redeemed by its issuer prior to maturity, typically occurring when interest rates fall and issuers choose to refinance at lower borrowing costs.

Variance ($\sigma^2$)

A statistical measure of volatility representing the average of squared deviations of an investment's returns around its mean rate of return.

Standard Deviation ($\sigma$)

A statistical measure of total investment risk calculated as the square root of variance, measuring the dispersion of an asset's returns relative to its mean return.

Semi-Variance

A downside risk metric that evaluates only the negative deviations of an asset's returns from its mean return.

Covariance

A statistical calculation representing the correlation between two variables multiplied by each variable's standard deviation, indicating whether two asset returns tend to move together or in opposite directions.

Correlation Coefficient ($r$)

A normalized measure of relative co-movement between two assets that ranges from $-1.0$ (perfect negative correlation) to $+1.0$ (perfect positive correlation), with $0$ indicating no linear relationship.

Beta ($\beta$)

A metric that measures how consistently and rapidly a security or portfolio moves relative to the overall market benchmark, calculated as the covariance of the asset with the market divided by the market's variance.

Coefficient of Determination ($R^2$)

The percentage of a security's or portfolio's return variation that is directly explained by changes in its benchmark index, calculated by squaring the correlation coefficient.

Alpha

A measure of an investment manager's performance indicating the excess return generated by the fund relative to the benchmark's return.

Sharpe Ratio

A measure of risk-adjusted performance developed by William Sharpe, calculated as an investment's return in excess of the risk-free rate divided by its standard deviation.

Treynor Ratio

A measure of risk-adjusted performance developed by Jack Treynor, calculated as an investment's excess return over the risk-free rate divided by its beta.