Glossary

Assets – All financial instruments and funds in which the mutual fund’s portfolio is invested.

Liabilities – In the case of mutual funds, liabilities include the management fees, fees and commissions for brokerage, safekeeping, depositary bank, Central Depository AD, Financial Supervision Commission, as well as other administrative expenses of the fund.

Depositary Bank – A bank that holds the assets (financial instruments and cash) of the mutual funds, performs payments and settlement on behalf and for the account of the fund.

Profit – In case of mutual funds, the realized profit is the difference between the price at which the investor has acquired units of the fund and the price at which they were sold.

Investment – The amount of funds invested in a mutual fund. Each investor acquires units of the fund, the number of which corresponds to the amount invested by the investor at the issue price per unit.

Liquidity – In the case of financial assets, liquidity describes the rate at which an asset can be bought or sold on the capital market without affecting its price. For investors, liquidity is the ability to quickly sell their units and dispose of their money without affecting the value of the funds invested.

Profitability – With mutual funds, the return on the invested funds accumulates directly in the fund’s price, and it does not represent a realized profit or loss until the investor does not withdraw his/her funds from the fund. In less frequent cases, it is possible for mutual funds to distribute yield in the form of a dividend. In general, funds from the portfolio’s return are used to reinvest in new financial instruments.

Mutual fund – A collective investment scheme that attracts funds from an unlimited number of investors for the purpose of investing in a single portfolio, according to investment limits, goals and constraints and risk profile specified in the Rules and Prospectus. Mutual funds are managed by management companies that have been licensed by the Financial Supervision Commission. They have a team of licensed investment consultants. Mutual funds are divided into investment companies and contractual funds. Investment companies are joint stock companies which issue shares and have their own management body, staff, assets. Unincorporated undertakings for collective investment are not separate legal entities, but separate assets that are managed by the management company’s team and do not have their own fixed tangible assets. In this sense, administration costs are lower. They issue units. Mutual funds are also divided by another criterion: open-ended funds – they issue and buy back their units every day and closed-end funds – do not offer their units on a daily basis for sale and redemption.

Investment consultant – A natural person licensed by the Financial Supervision Commission who professionally manages assets and provides investment advice on financial instruments and portfolios.

Management fee – For mutual funds this is the management fee that the fund pays to the management company. It is defined as a percentage on an annual basis, but is calculated on a daily basis, given the determination of the net asset value. In this way, the investor pays a management fee only for the period during which his/her funds were invested in the portfolio of the fund.

Financial Supervision Commission – Supervisory Body of the Bulgarian Capital Market. For more information: www.fsc.bg

Central Depository AD – A clearing institution performing centralized settlement of financial instruments. For more information: www.csd-bg.bg

Bulgarian Stock Exchange – Sofia AD – A regulated market in Bulgaria where financial instruments are traded. For more information: www.bse-sofia.bg

Fixed-income instruments – Money market instruments, government securities, bond issues carrying fixed income in the form of interest.

Bonds – Fixed income instruments that give return in the form of interest that can be paid at different times – usually three or six months. In addition to interest income, investors may also have a capital gain – the difference between the price at which they bought the bond and the price at which they sell it in case they do not hold it until maturity. Bonds differ according to their issuer, rating , currency, residual term to maturity, type, collateral, etc.

Shares – Securities issued by joint stock companies; their holders are participants in the capital of the company and have the right to vote at the General Meeting of Shareholders, the right to a dividend and the right to a liquidation stake.

Derivative instruments – Financial instruments that are linked to a particular underlying asset (share, index, commodity, currency, etc.). They can be different types: forwards, futures, options, currency and interest rate swaps, etc. They are used both to hedge the risk of a portfolio and to increase its exposure to a particular asset in active management techniques.

Financial instruments – A common concept for all classes of assets – shares, bonds, money market instruments, derivative instruments, indices, etc.

Capital growth – An opportunity to realize profitability from the positive change in the price of the financial instrument.

Benchmark – Used as a basis for comparison for the fund’s performance. The comparison may be against another fund with a similar risk profile, relative to the industry (group of funds), against a market index on which the fund operates, etc.

Volatility – A term indicating the fluctuations in the price of a financial instrument for a certain period of time.

Risk profile – Generally this is the degree of risk of a fund and is divided into three main categories: Conservative, Balanced, and High Risk. The European Securities and Markets Authority (ESMA) has introduced a measure of the different risk levels of the funds, which group the funds into 7 categories depending on their volatility over a certain historical period.

Synthetic Risk Reward Indicator (SRRI) – Categorizes mutual funds against the level of risk. There are 7 grades, 1 is the lowest level of risk and 7 is the highest. The levels are determined by the historical volatility (fluctuation) in the fund’s price.

Diversification – A strategy for allocating and minimizing risk by investing in different types of financial instruments, sectors, currencies, etc.

Investment horizon – The period for which investors are willing to invest their available funds.

Recommended investment horizon – A period calculated on the basis of historical fluctuations in the fund’s performance. It gives an idea to investors for what time it is advisable to invest their funds in a particular fund at a given level of risk.

Investment policy – description of the investment strategy, objectives and limits that a fund will follow at a given level of risk.

Investment portfolio – A set of financial instruments and money whose management is subject to a strictly defined investment policy and constraints.

Net asset value – the difference between the assets in the fund’s portfolio and its liabilities. It is calculated at least twice a week, most funds calculate it every day. It is also the product of the number of units outstanding of the fund, multiplied by the price per unit.

NAV per unit – represents the net asset value of the fund divided by the number of units outstanding. Often in practice, it is called price per unit.

Unit – Collective investment schemes organized in the form of mutual funds issue units daily against the amount invested in their portfolios. These units are financial instruments that express the rights of their holders to the assets of the fund and are divisible to the fourth decimal place. They have their price, which is the net asset value per unit.

European Securities and Markets Authority (ESMA) – An independent body in the EU that issues valuable guidelines for financial market practice aimed at increasing investor protection and a stable and properly functioning financial system. For more information: www.esma.europa.eu

Issuing value – The price of a fund unit upon subscription. Equal to the net asset value per unit plus issuing costs, if any.

Redemption price – The price of a fund unit in case of redemption. Equal to the net asset value per unit, less redemption costs, if any.

Hedging – An effective technique to protect against an adverse change in the price of an asset. It is usually done by  offset deals through derivatives in the fund’s portfolio, thus limiting possible losses in the future.

Risk – In finance, risk is generally the difference between expected and actual return on an asset.

Specific risk – Risk specific to a particular company or sector can be managed through diversification.

Market risk – Determined by market movements and market trends and can not be reduced by diversification.

Geographical risk – Risk depending on the region in which the fund invests.

Currency risk – It is conditioned by exposure to currency other than that of the fund and changes in the exchange rate.

Money Market Fund – A fund that can invest in short-term securities with a maturity of up to 1 year, money market instruments, deposits. The geographic focus is determined by the asset’s currency.

Bond Fund – The investment focus of the fund comprises fixed income instruments, government securities, municipal bonds, mortgage bonds, corporate bonds. Its risk is determined by the duration of bond issues, the higher it is, the more volatile the price of the fund is in relation to 1%  change in interest rate.

Mixed Conservative Fund – Invests in bonds and shares. Investments in shares are limited to 20% of the fund’s assets.

Mixed Balanced Fund – Invests in various assets and markets, with proportion of shares in the portfolio ranging between 20% and 50% of assets.

High Yield Fund – Invests primarily in equity securities and derivative financial instruments aiming at higher capital growth with a high level of risk.