Mutual Fund Terms and their meanings explained simply

Term

12b-1 Fee

Promotion expenses such as advertising and public relations that are paid for by shareholders.

Accumulation Units

A type of unit or share that allows for the automatic reinvestment of income earned from the portfolio.  The number of Accumulation units does not change as income is reinvested.  In the case of UK domiciled funds, income is reinvested on a net (after tax) basis.  For funds based in offshore domiciles, reinvestment is normally transacted on a gross basis: the liability of individual investors to tax being determined by their country of residence.

Administrative costs

Sometimes covered in the annual management fee, these are the costs of record keeping, postage, maintaining a customer service line, etc.  Though all necessary costs they vary in amount from fund to fund.  Some funds can keep these costs below 0.20% of fund assets while others may be as high as 0.5%.

Annual Management Fee

The fees paid from the fund each year to cover the management of the portfolio and other incidental expenses or shareholder administration services.  Sometimes referred to as administrative costs. Usually a fixed percentage of the total value of the investment,  about 0.50% to 1.0% annually, that is assessed once a year.

Arbitrage

Trading activity to profit from the correction of price or yield anomalies in markets.   This often involves taking a position in one market and offsetting the position in another.  As prices or yields move back into line, such positions may be profitably closed out.

Asset Allocation

The process of diversifying a fund's assets between different asset classes, geographic or industry sectors, such as property, mining, manufacturing, retail etc to optimise the risk/return trade off.

Authorised Fund

A unit trust or OEIC that is authorised by the Financial Services Authority, the UK regulatory authority, for promotion to the general public in Britain.

Back-end Load

A charge levied on investors when investment fund units are redeemed.  Funds with back-end loads are sometimes called "B" shares. This fee is sometimes called a contingent deferred sales charge, or CDSC.   It is generally much higher than a front-end load. However it does decline incrementally to zero over time, and usually disappears in five to eight years. Funds which have back-end loads usually charge 12b-1 fees, which are typically higher than for front-end load funds. The "B" shares can be converted into "A" shares after the load period has expired.

Bank Debentures

Bank Debentures are also referred to as a "secured asset management program".   This is an investment vehicle where the principal investment is fully secured by a Bank Endorsed Guarantee by the bank at the time the funds are deposited.  The guarantee is issued to secure the Investor's principal for the contract period.  The principal is managed and invested to give a guaranteed high return to the investor on a periodic basis. There is no risk of losing the investor's principal investment.

Bear Market

A term used to describe stockmarkets when share prices are falling over a prolonged period.

Benchmark Index

An index against which the manager's investment performance is regularly measured.

Beta

A measurement of volatility Beta is calculated using regression analysis.  It is a measurement of how much a fund will move in proportion to how the market moves.  The Beta of the market is defined as 1.

Blended fund

These mutual funds are generally a combination of growth and value stocks.

Blue Chip

The shares of large well-established companies, which are household names.

Bond

Bonds are IOUs or debts issued by governments or companies.  The purchaser of a bond is effectively lending money to the issuer.  The bond returns interest to the bond purchaser, generally at a set percentage, hence their name 'fixed-income' funds.

Bull Market

A term used to describe stock-markets when share prices are rising over a prolonged period.

Closed End Fund

A fund with a fixed number of shares in issue that are publicly traded. The trading price of a closed-end fund share relates to the supply and demand for fund shares.  I has little to do with its current underlying net asset value.

Cumulative Return

The investment return over a period of years, where each annual return accrues over the term.

Debenture

A long term fixed interest security issued by a company secured against its assets. In US terminology it is an unsecured fixed interest bond.

Distributions

Dividends paid to a fund investor accounting for the income (and in some cases realised capital gains) earned by an investment fund.

Domicile

The location where a fund or investment company is legally established.

Dow Jones

An index of the average performance of 30 of the top US companies.

Exit Fee

A fee levied on investors when units in the investment fund are redeemed.

Expense ratio

The percentage of total assets used to pay for fund expenses.  High expense ratios decrease investors' returns. If two funds both earned a 10% return before fees but fund A had an expense ratio that was 2 percent higher than fund B, you'd lose an extra 20 percent of your expected returns each year if your money was in fund A.

Front-end Load

A charge incurred by investors when investment fund units are bought.  Funds with front-end loads are sometimes called "A" shares. This initial sales commission ranges from 2.0-8.5% of the investment. If dividends, interest, and capital gains are reinvested the fee may also be levied on those amounts. These funds usually also charge a 12b-1 fee.

Fund

A Fund is a pooled collection of money that may be invested in several other companies.

Hedge Funds

Funds which have the ability to "gear" portfolios by borrowing to increase their exposure to underlying stockmarkets. This method increases risk as well as the potential for gain. Another way to "gear" portfolios is to offset stockmarket exposure by "short" selling (selling stocks not owned in the hope of buying them back more cheaply at a later date).  Yet another way is to cover the equity position with derivative instruments, normally stock or stockmarket options or futures. These last two strategies have less risk, but are not immune to losses or lost opportunities.

Income Reinvested

This is the UK investment industry standard for performance comparison. In order to fully reflect investment returns, fund performance is usually expressed as "total return", i.e. including any capital appreciation and the reinvestment of net income distributions in further units or shares.  Where the funds are domiciled offshore, reinvestment is normally transacted on a gross basis with the tax liability of individual investors being determined by their country of residence.

Index Fund

A passively managed mutual fund that seeks to match the performance of a particular stock market index. The fund may hold all constituent companies in the same weightings as the underlying index or hold a substantial proportion of the index, but invest in a representative sample of the smaller capitalisation stocks to enable their fund to move in line with the index within a stated tracking error.  Index funds often outperform the actively managed mutual funds.

Large-cap

Refers to large companies worth $5 billion or more

Level load

Funds with level loads are sometimes called "C" shares. They do not charge a front-end or back-end load but instead impose a high 12b-1 fee each year. Any fund with no front-end or back-end load that charges a 12b-1 fee in excess of 0.25% is considered a level-load fund.

Load funds

Mutual funds that have a sales charge. The maximum 12b-1 fee allowed by a no-load fund is 0.25% per year.

Maximum Drawdown

The high to low movement over a specific investment period recorded by a security or fund.

Mid-cap

Refers to medium-size companies worth $1 billion to $5 billion

Minimum investment

The minimum amount to initially invest in a fund.  It can be anything between $1,000 and $100,000

Money Market Fund

A fund investing in cash deposits and short-dated securities, usually with a maturity of one year or less.

NAV

Basically this means the funds price per share. It is calculated at the end of every day.  The total value of the funds net assets is divided by the number of shares. (e.g. If a fund had $100 million in assets and there were 20 million shares then the NAV would be$5.)

Net Assets

The funds securities/investments less all liabilities.

No Load Fund

An investment fund that does not levy an initial charge.  The maximum 12b-1 fee allowed by a no-load fund is 0.25% per year.

Oeic

Acronym for open ended investment company.  An investment company providing a product where the number of units/shares on issue can be added to. The investment company must be prepared to buy back its units/shares on any day for their current asset value.

Open Ended Fund

A fund where the number of units/shares on issue is not fixed.  The investment company can add new units/shares at any time and is prepared to buy back its units/shares normally at any time for their current asset value.

Performance Fee

Charges levied to reward the fund managers for positive performance by a fund or its outperfomance of a stated index.

Prospectus

This is an official document with intentions of fully describing the mutual fund and giving information on the fund such as: managers, policies, objectives, restrictions, services and fees.

Redemption fee

Fee levied for selling shares of your index fund. Usually a fixed percentage of the total value of your investment.

S&P 500

Standard & Poor's 500 Index is usually considered the benchmark for U.S. equity performance. It represents 70% of all U.S. publicly traded companies.

Sector

The market sector is the specific industry type in the economy such as: health, education, financial, technology, energy, communications, biotechnology etc.

Small-cap

Refers to smaller companies worth $250 million to $1 billion

Total Return

Includes any capital appreciation of the investment and the reinvestment of net income distributions in further units or shares on a periodic basis.

Turnover Ratio

The turnover ratio for a mutual fund, is the percentage of a fund's assets that have changed over the course of a given time period (typically a year). It is a measure of the fund's trading activity.  The turnover ratio is calculated by dividing the average assets during the period by the lesser of the value of purchases and the value of sales during the same period. Mutual funds with higher turnover ratios tend to have higher expenses.

Umbrella Fund

An investment fund comprising several sub-funds.  Each sub-fund is usually invested in different market sectors or geographical areas.  Investors can generally switch between sub-funds free of charge.

Volatile

A large movement in fund returns.  Could be from very high to fairly low positives or even medium high positives to large negative returns.  It reflects the likelihood of large fluctuations in return.