Investment funds dictionary

Glossary of financial terms for investment funds.

This digital financial dictionary contains everything you need to know about investment funds, arranged from A to Z.

Bankinter has developed the platform as a handy, interactive guide to understanding the most common concepts used in investment fund prospectuses and key information documents: contracts, clauses, terms and conditions, annexes, etc., both in physical and digital format.

Alpha (á)

Excess return on a fund relative to the return of the benchmark index. The better the manager, the higher the alpha obtained by the fund.

Asset Allocation

This is defined as the apportionment of the assets in a portfolio according to the chosen combination of assets, risk and geographical area. Both bottom-up and top-down analyses are performed to apportion assets.

Active Management

The objective of this management system is to produce better returns for the managed portfolio than the market average by using independent criteria based on the manager's information and experience in selecting investments. It is the opposite of passive management which simply mirrors a market index.

Benchmark

This is a standard or index, such as the Euribor, the Ibex 35 or Eurostoxx 50, used to compare the performance and management of an investment fund.

Beta (â)

This measures the sensitivity of an individual fund to market fluctuations reflected in its benchmark. A beta value higher than 1.0 implies greater variations than the benchmark, both upwards and downwards. A beta value of 1.0 is indicative of a strong correlation with the market. Lastly, a beta value of less than 1.0 implies less volatility than the market.

Capital Gain

The rise in value produced by the difference between the purchase price and the higher sale price of the assets in an investment fund.

Deposit fee

Fee received by the depositary of an investment fund for its depositary and custodian services. It is deducted daily from the net asset value of the fund and is therefore already included in the price. The amount is stated in the fund prospectus.

Duration

The duration of a bond is a measure of the average maturity weighted by all the cash flows paid by the bond. In an investment fund, the duration will be the weighted average of the durations of all the bonds that make up the fund. Duration is also used to measure the sensitivity of the bonds in a fund to changes in interest rates. The longer the duration, the greater the price sensitivity to interest rate fluctuations in the market.

Disability

A loss in value resulting from the difference between the purchase price and the lower price at which an investment fund's units are sold.

FIFO

First-In, First-Out. The valuation method used for similar investments, with respect to their cost and sale price, in which the first investments acquired are considered to be the first to leave the investment fund. This system is used for tax calculations under tax regulations in force in Spain.

Fixed Income

This refers to financial products that pay a set interest rate to investors until the maturity date, irrespective of whether the interest rate remains the same or not. The price, coupons/interim payments and final redemption value are all determined on the issuance date. During the life of the bond, securities will vary according to fluctuations in the interest rates. Fixed-income securities represent a proportional part of a loan to a private enterprise, public institution or government. The owners of the securities become creditors in proportion to their contribution.

High Yield (Junk bonds)

A financial asset issued by a company with a low credit rating, below BBB-, and therefore, with a higher risk of non-payment. These companies issue debt at a higher interest rate than companies with the best credit rating (Investment Grade).

Investment Grade

A group of credit ratings that indicates a low risk of default (ranging from 'AAA' to 'BBB-'). Companies with a rating in this range will issue debt at a lower interest rate than others with a lower credit rating, so they obtain financing more cheaply. 'AAA' is the best credit rating and it is only granted to countries or companies with an extremely strong capacity to meet financial commitments.

Investment Policy

The investment strategy of a fund (fixed income, equity, mixed fixed-income, mixed equity, absolute return, etc.). The investment policy is always clearly stated in the fund prospectus.

Information ratio

Yield generated by each unit of Tracking Error or deviation against the benchmark index. (See Tracking Error).

IRR (Internal Rate of Return)

This term applied to investment in financial assets is the discount rate that makes the net present value zero for all collections and payments derived from the subscription and possession of assets where the assumption is that these collections and payments will be reinvested or financed, respectively, at the same interest rate as the rate calculated, until maturity. For fixed-income instruments it is similar to the AER for deposits.

Management fee

Fee charged by an investment fund manager for the services provided. It is deducted on a daily basis from the net asset value of the fund and is always a percentage of the assets under management. Some funds also apply a success fee to the profits obtained. The amount is stated in the fund prospectus.

Minimum contribution or investment

This is the minimum initial amount required to invest in an investment fund. It is important information to bear in mind because if you transfer capital from one investment fund to another and the amount transferred is less than the minimum contribution required by the destination fund, the transfer may be declined.

Net asset value

The net value of each share in an investment fund. It is calculated on a daily basis by dividing the fund's assets by the number of shares.

Purchase fee

A fee that the management entity may charge the unit-holder when it purchases units in an investment fund. The Fund prospectus or the quarterly report will state the amount.

Passive Management

Management system where the aim is for the managed assets to mirror the market performance by building a portfolio that replicates the index.

Portfolio Management

This consists in selecting the optimum return/risk combination for each investor. The investment process is therefore based on analysing the investor's risk tolerance, selecting investments and executing buy and sell orders for specific securities.

Pledging of units

The unit holder may pledge its units in an investment fund as a guarantee against a loan from a financial institution.

Portfolio

This refers to the set of assets that make up an investment fund.

Quartile

This is used to gain a picture of the position of funds in terms of the profitability obtained compared with similar funds. Quartiles represent sets of 25% of the funds in the total list of funds of a specific category, grouped according to descending profitability. This means that the first quartile comprises 25% of the best funds with the highest profitability, ordered from highest to lowest, and so on and so forth with the second, third and fourth quartiles. Occasionally, larger partitions are used, such as deciles (10%) and centiles (100%).

Reimbursement fee

A fee that the management entity may charge the participant when it sells its units in an investment fund. The Fund prospectus or the quarterly report will state the amount.

Sharpe ratio

This is the return offered by an investment for each unit of risk borne. This ratio is calculated after deducting the return on a risk-free asset, which is usually the yield on Treasury Notes or an index such as Euribor. A higher Sharpe Ratio means better risk management, so the fund return offsets the risk incurred. Sharpe ratios above 1 are considered to be very positive, as they offer higher returns relative to the risk that the fund has taken on.

TER (Total Expense Ratio)

The TER measures the total costs of an investment fund. On top of management and deposit fees, it also includes certain operating and administrative expenses, legal costs, etc., incurred by the investment fund. The TER is public and can be consulted in the information provided by the manager and/or marketer.

Tracking Error

This measures the deviation of a fund from the benchmark index as result of the securities selected. The higher it is, the more active the fund management will be.
-If it is 0%, the fund is behaving like its benchmark index.
-Between 2% and 4% is considered to be low.
-Over 6% or 7% is considered to be high.

Underweigh

Invest in a security at a lower proportion than the security represents in the benchmark index of the portfolio managed. (See Benchmark index).

Units

Since funds are assets without a legal personality, made up of individual contributions from different investors, when you invest in a fund you don't acquire shares but units. These units represent the investment made by each co-owner or unitholder, all of whom have ownership rights over the fund.

Unit Holder

Unit holders are the investors in a fund. As either individuals or legal entities, they pay into an investment fund and are therefore the owners of the fund. Their ownership rights are represented by the book entry system.

VaR (Value at Risk)

VaR measures the maximum possible loss expected for a fund or portfolio with a probability rate of 95%. It is used to anticipate and control the level of risk exposure based on past performance. The investment policy of certain managed funds and portfolios takes into account the maximum VaR levels.

Volatility or standard deviation

This measures the variance or dispersion of returns for a given fund with respect to its average return. It measures the assumed risk of an investment based on the past performance of the fund.

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