The Institutional Financial Dictionary

Alpha measures the value that a fund manager adds or subtracts relative to a benchmark's risk profile. A positive alpha indicates that the manager outperformed the market after adjusting for volatility (Beta), whereas a negative alpha indicates underperformance.

In pure CAPM theory, alpha is the intercept of the security characteristic line. Zero alpha means the fund generated exact compensation for its systematic market risk.

When a Small-Cap or Micro-Cap fund balloons to ₹30,000+ Crores, the manager cannot deploy fresh capital into illiquid small companies without driving up stock prices.

The manager is forced to either hold large-cap stocks (diluting small-cap alpha) or hold 100+ tiny positions (becoming an expensive closet index).

Because futures contracts typically trade at a slight premium to cash prices, the fund locks in this spread and unwinds at monthly expiry. It carries virtually zero equity market directional risk.

Under Indian tax law, holding > 65% in domestic equities qualifies Arbitrage funds for Equity Taxation (12.5% LTCG after 1 yr vs 30%+ slab rate on FDs).

Beta quantifies systematic market risk that cannot be eliminated through diversification. A Beta of 1.0 means the fund moves in exact tandem with the benchmark (e.g. Nifty 50).

A Beta > 1.0 indicates higher sensitivity (amplified gains in bull markets, deeper drawdowns in crashes). A Beta < 1.0 indicates a defensive, lower-volatility strategy.

• **Equity Funds (Holding > 12 Months)**: Long-Term Capital Gains (LTCG) taxed at **12.5%** on gains exceeding the annual ₹1.25 Lakh exemption limit.

• **Equity Funds (Holding ≤ 12 Months)**: Short-Term Capital Gains (STCG) taxed at **20.0%**.

• **Debt Funds (Investments made after April 1, 2023)**: Taxed at marginal income tax slab rates (no indexation benefit).

• **Unlisted Shares & Real Estate LTCG**: 12.5% without indexation.

Rather than rebalancing on arbitrary calendar dates (which incurs unnecessary tax and transaction friction), 5/25 rebalancing triggers when:

• An asset class drifts by **5% absolute** from its target weight (e.g. 60% equity rising to 65%), OR

• An asset class drifts by **25% relative** to its target weight (e.g. a 10% gold allocation rising to 12.5%).

In a **Direct Plan**, you invest directly with the AMC. Zero intermediary commissions are paid, resulting in a higher daily NAV and 0.5%–1.5% higher annual compounded returns.

In a **Regular Plan**, the AMC pays an ongoing trail commission out of your assets to the broker/bank every single year for as long as you stay invested.

An emergency fund is insurance against job loss, business disruption, medical emergencies, or home repairs. It prevents you from being forced to distress-sell equity SIPs during market crashes.

Calculated based strictly on non-negotiable living expenses (rent, EMI, food, utilities, school fees, insurance premiums).

While mutual fund NAVs are updated once daily at 9:00 PM, an ETF’s underlying basket of shares changes value every second.

iNAV reflects the intraday fair value per ETF unit. Comparing the market trading price on the stock exchange to iNAV reveals whether the ETF is trading at a premium or discount.

Drawdown measures the worst-case capital destruction an investor would have experienced if they invested at the absolute worst possible market top.

It is a critical metric for stress-testing psychological tolerance: a 50% drawdown requires a 100% gain just to break even.

Modified duration estimates the percentage price change of a bond or debt fund portfolio for a 100 basis point (1.0%) shift in interest rates.

Bond prices move inversely to interest rates. A fund with an MD of 5.0 years will gain ~5% if interest rates fall by 1%, and lose ~5% if rates rise by 1%.

A turnover of 100% means the fund manager has replaced the entire portfolio within one year. High turnover indicates aggressive short-term momentum trading.

High turnover creates hidden transaction costs (brokerage, STT, bid-ask friction) that are paid out of fund assets and do not appear in the published TER.

When markets crash, your fixed SIP buys more mutual fund units at lower NAVs; when markets rally, it buys fewer units at higher NAVs.

This naturally lowers your average acquisition cost per unit over time and eliminates the psychological impulse to time market tops and bottoms.

Developed by Nobel laureate William Sharpe, this ratio calculates return generated above the risk-free rate divided by standard deviation.

A higher Sharpe Ratio signifies superior risk-adjusted efficiency. However, a major limitation is that it penalizes upward volatility (gains) equally with downward crashes.

Unlike the Sharpe ratio which treats all volatility as risk, Sortino isolates and penalizes only negative return deviations below a minimum acceptable return (MAR).

Because investors welcome sharp rallies and fear only steep crashes, Sortino provides a more realistic view of downside protection.

Standard deviation measures how wildly a fund’s NAV swings. In a normal distribution, ~68% of returns fall within ±1 standard deviation of the mean, and ~95% fall within ±2 standard deviations.

Lower standard deviation indicates more predictable, smoother performance.

Published by S&P Dow Jones Indices, SPIVA measures mutual fund performance across global markets adjusting for survivorship bias and style drift.

In India, SPIVA consistently reveals that over 80%–88% of active Indian Large-Cap equity funds fail to beat the S&P BSE 100 / Nifty 50 over 5, 7, and 10-year investment horizons.

While Sharpe evaluates total risk (systematic + unsystematic), Treynor evaluates return per unit of systematic risk (Beta). It is ideal for evaluating a fund that is part of an already well-diversified portfolio.

Tracking error measures how accurately a passive fund replicates its underlying index. Causes include cash drag for redemptions, expense ratios, dividend reinvestment timing, and corporate actions.

A lower tracking error indicates high replication fidelity.

TER covers investment management, registrar fees, custodian charges, marketing, and (in Regular plans) distributor commissions.

All published NAVs are calculated daily net of TER. Even a 1% difference in TER strips away 25–30% of your accumulated wealth over a 20-year holding period.

1. **Psychological Risk Tolerance**: Willingness to take risk without panic selling during a 30% market crash.

2. **Financial Risk Capacity**: Objective ability to absorb financial losses based on emergency runway, stable cash flow, net worth, and debt liabilities.

3. **Goal Time Horizon**: The remaining duration before the capital must be liquidated.

A balanced portfolio cannot exceed the lowest score of these three pillars.

YTM represents the weighted average gross interest rate generated by all the bonds held within a debt fund. Net investor return equals YTM minus the fund’s TER.

YTM is not a guaranteed return because portfolio holdings and reinvestment rates fluctuate over time.