Alpha: The amount by which a fund has outperformed its benchmark, taking into account the fund’s exposure to market risk (as measured by Beta). Alpha is also known as the residual return.
Annual Management Charge (AMC): A fee, usually expressed as a percentage, charged by the investment manager to cover the costs of running the fund. It is deducted from the fund’s net assets.
Benchmark: An index against which a fund measures its performance. Funds typically compare their performance against indices such as the FTSE 100 or the S&P 500.
Bond: A debt issued by a company or the government. During the life of the bond, the bondholder receives regular interest payments based on the coupon (interest) rate. On maturity, the debt is repaid. Certain exceptions apply, such as zero-coupon bonds, which provide no interest payments but are issued at a discount.
Bond Funds: A portfolio which invests mainly in bonds with the aim of providing a steady stream of income to investors. The value of bond funds tends to be inversely linked to interest rate changes.
Diversification: Spreading risk by investing in assets with different characteristics. For instance, an individual might invest in a combination of bonds, property and shares. Or shares-based funds might invest in a variety of countries or market sectors. Investors can also diversify by investing in a range of different types of funds.
Dividend: An after-tax distribution of a company’s or fund’s profits to shareholders, normally specified in pence per share in Britain. Dividends are usually paid twice a year: interim and final.
Exchange-Traded Funds: ETFs are hybrid instruments combining aspects of investments trusts and unit trusts and offering many of the benefits of both. They trade like shares on the London Stock Exchange. They mimic stock market indices and are passively managed just like an index fund.
Fixed Income Funds: A fund which invests primarily in bonds. Its assets can include corporate debt, government debt or a combination of the two.
Fund: A portfolio of assets such as bonds or shares.
Equity: A fund investing primarily in shares. It can be based on any number of investment strategies.
Gilts: A UK government-issued bond. Because a gilt is guaranteed by the government, it is generally one of the safest investments in the UK.
Inflation: The level at which wages and prices increase over a certain period of time, usually a year. In the UK, this is measured by the Retail Price Index (RPI) and the Index of National Average Earnings (NAE).
ISIN: Stands for International Securities Identification Number (ISIN). A coding system used to distinguish securities.
Liquidity: A measure of how easy it is to buy and sell shares without notably moving the share price.
Open-Ended Investment Companies (OEICs): Similar to unit trusts, but established as companies that issue shares to investors. Often, OEICs are made up of a series of sub-funds. Each sub-fund has its own investment objective. The value of each sub-fund, each share price, is usually calculated on a daily basis.
Passive Funds: Another name for funds which track market indices such as the FTSE 100 or the S&P 500. Also called index funds and tracker funds.
Portfolio: A holding of investment funds. A balanced portfolio is made up of a number of different types of assets, such as cash, shares, corporate bonds and property.
Retail Price Index (RPI): A measure of inflation. This index tracks a basket of goods and services, such as clothing, food, household goods and medical care, purchased by an average consumer.
Risk: All investments and funds have risk factors. Some have higher overall risk ratings than others. Higher-risk investment funds offer the potential for higher returns, but carry with them an increased risk of not getting back all the money you initially invested. The lowest-risk type of investment is cash.
Risk Profile: A measure of how risk-averse an investor is. Investors are risk-profiled to determine what securities will best fit their investment goals.
Total Expense Ratio (TER): Sum of all expenses for the financial year, consisting of management fees, performance fees, directors’ fees, administration fees, custody fees, audit fees, marketing fees and all other expenses. We then calculate the average monthly gross assets. We then divide the total expenses by the average monthly total assets and multiply by 100 to arrive at this ratio. This is applied predominantly to funds and the expenses charged to them.
Unit Trust: One of the most common forms of investment funds used by retail investors. Increasingly they are being replaced by open-ended investment companies (OEICs, see above).
Volatility: The observed price movement of an asset. Standard deviation is the most widely used measure of volatility. Volatility and standard deviation are generally considered to be a measure of risk.
Yield: The rate of return, expressed as a percentage, paid on an investment — in the form of dividends for stocks and funds or the coupon rate for bonds. Yield should not be confused with total return.
