Mutual fund glossary

Plain-English definitions of the metrics and terms you will meet on FindMF, with the exact formulas we use where relevant.

Alpha: Alpha is the return a fund delivers above (or below) what its benchmark would predict for the risk it took. Positive alpha means the manager added value beyond simply riding the market; negative alpha means they lagged after accounting for risk.
AUM (Assets Under Management): AUM is the total market value of all the money a mutual fund scheme manages on behalf of its investors. It rises with inflows and market gains, and falls with redemptions and market losses.
Beta: Beta measures how much a fund moves relative to its benchmark. A beta of 1.0 moves in line with the index; above 1.0 is more volatile (amplified ups and downs); below 1.0 is steadier.
CAGR (Compound Annual Growth Rate): CAGR is the smoothed annual rate at which a lump-sum investment grows over a period, as if it compounded at a steady rate each year. It is the standard way to compare mutual fund returns over one year or longer.
ELSS (Equity Linked Savings Scheme): An ELSS is a tax-saving equity mutual fund that qualifies for a deduction under Section 80C and carries a mandatory 3-year lock-in, the shortest of any 80C option. It invests predominantly in equities, so returns and risk track the stock market.
Exit Load: An exit load is a fee a mutual fund charges when you redeem units before a specified holding period, expressed as a percentage of the redemption value. It is designed to discourage very short-term withdrawals.
Expense Ratio (TER): The Total Expense Ratio (TER) is the annual percentage a fund charges to cover management, admin, and distribution costs. It's deducted daily from the NAV, so you never see a separate bill — but it quietly reduces your returns every year.
Maximum Drawdown: Maximum drawdown is the largest peak-to-trough fall a fund suffered over a period, before it recovered. It answers "what's the worst loss I would have lived through?" and is a gut-check on downside risk.
NAV (Net Asset Value): NAV is the per-unit price of a mutual fund: the fund's total assets minus liabilities, divided by the number of units outstanding. It's calculated once each business day after markets close.
Sharpe Ratio: The Sharpe ratio measures return earned per unit of total risk, above the risk-free rate. A higher Sharpe means better risk-adjusted returns; it lets you compare funds that took different amounts of volatility.
SIP (Systematic Investment Plan): A SIP is a way of investing a fixed amount in a mutual fund at regular intervals, usually monthly, instead of all at once. It automates disciplined investing and averages your purchase price across market ups and downs.
Sortino Ratio: The Sortino ratio measures return per unit of downside risk, counting only losses as risk. It's a refinement of the Sharpe ratio that doesn't penalise a fund for big positive swings.
Tracking Error: Tracking error measures how closely an index fund or ETF follows its benchmark, calculated as the volatility of the difference between the fund's returns and the index's returns. Lower tracking error means tighter replication of the index.
Volatility (Standard Deviation): Volatility, measured as the annualised standard deviation of returns, shows how much a fund's returns swing around their average. Higher volatility means a bumpier ride and a wider range of likely outcomes.
XIRR (Extended Internal Rate of Return): XIRR is the annualised return on an investment with multiple cash flows on irregular dates, such as a SIP. It is the correct way to measure SIP returns because each instalment is invested for a different length of time.