Account minimum: The minimum amount a Fool must initially invest in a fund, typically between $1,000 and $10,000.
Administrative costs: Costs of record keeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund. The thriftiest funds can keep these costs below 0.20% of fund assets, while the ones who use engraved paper, colorful graphics, and phone answers with highfalutin’ accents might fail to keep administrative costs below 0.40% of fund assets.
Average cost: One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, you determine the average price of all your shares, including those purchased with reinvested dividends and capital gains. That price becomes your cost basis.
Back-end load: Funds with back-end loads are sometimes called “B” shares. These funds impose a contingent deferred sales charge, or CDSC, which is paid at the time of redemption. This fee is generally much higher than a front-end load. The good news is that it declines incrementally to zero over time, and usually disappears in five to eight years. These funds charge 12b-1 fees, which are typically higher than for front-end load funds. These funds may convert “B” shares into “A” shares after the load period has expired.
Blended fund: These mutual funds are generally a combination of growth and value stocks.
Bond index funds: In the world of bond investing, we don’t see any reason to go anywhere but a bond index fund. The top dog is the Vanguard Total Bond Market Fund (VBMFX), which mimics the Lehman Brothers Aggregate Bond Index. There are also short-, intermediate-, and long-term bond funds.
Capital gains: When the fund sells a stock, it incurs short-term and long-term capital gains or losses. Unlike a corporation, a mutual fund does not itself pay income taxes. By law, each year the fund must distribute that year’s net investment income (the total of dividends and interest received less fund expenses) and net realized gain (gains less losses on securities sales) to the fund’s shareholders. That means that you get to foot the taxes due on those gainsFor various reasons, actively managed mutual funds don’t invest all the money at their disposal, but instead maintain cash balances of approximately 8%.
Credit risk : The danger that the issuer of a corporate or municipal bond will experience financial difficulties causing deterioration in credit worthiness, perhaps even a default. Treasury securities are considered free of this risk.
Currency risk : The risk, faced by investors in foreign bond and stock funds, that the foreign currency (say, the US dollar) will appreciate relative to the currencies in which the securities are denominated. When that happens, the funds will realize a currency loss.
Custodian : The independent organization, often a bank, that is responsible for the handling and safekeeping of a fund’s cash and securities.
Disclosure of mutual fund after-tax returns: SEC rule requiring all mutual funds to state explicitly their after-tax returns their prospectuses, starting February 15, 2002.
Dividends & interest: Throughout the year, most mutual funds will receive dividends and interest on the securities they own. If the total passes the fund’s annual expenses, you get the rest. Even if you reinvest those dividends, you have to pay ordinary income taxes on that money. That is to be expected — it’s money you made.
Dow Jones Industrial Average: The Dow Jones Industrial Average is made up of 30 stocks. The index shares for the Dow 30 are commonly called Diamonds (AMEX: DIA).
Expense ratio: The percentage of total assets used to pay for fund expenses.
Funds of funds : These are all-in-one funds that invest in other mutual funds.
First-in, first-out (FIFO): One of three methods to determine the cost basis of the mutual fund shares you sell. Under FIFO, the first shares purchased are considered the first shares sold. This is the IRS’s default method. Because these tend to be the lowest-priced shares, this method usually results in a higher gain. A higher gain means higher taxes.
Front-end load: Funds with front-end loads are sometimes called “A” shares — though they don’t always make the grade. These funds charge an initial sales commission that ranges from 2.0-8.5% of the investment. The fee may also apply to reinvestments of dividends, interest, and capital gains. These funds usually also charge a 12b-1 fee.
Growth: Funds or stocks that carry relatively high valuations, because rapid growth is expected.
Hedging : A general term used to describe any of several risk-reduction strategies. A fund manager might partially hedge against a market decline simply by moving a larger fraction of the portfolio into cash. Alternatively, the manager could sell stock-index futures contracts. If the market falls, the gains on the shorted futures would more or less offset the decline in the portfolio’s value.
High-yield bond : Issues rated below investment grade (as evaluated by credit rating agencies). Although they often promise high income, junk bonds carry high credit risk and might be near or in default. Also known as high-yield bonds, junk securities are particularly sensitive to changes in economic conditions. See Junk bond.
Index Fund : A fund that replicates a particular market index such as the BSE Sensex/CNX Nifty by holding many if not all of the same stocks and in the same proportion as in the benchmark index. With low-cost, passively managed index funds, you’re assured of doing about as well as the benchmark index.
Inflation risk : The danger that the returns from one’s investments will fail to keep pace with increase in the general price level. This is a major problem with secure investments such as Treasury bills, while stocks offset this risk to a large extent.
Investment advisory fee or management fee: Money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund’s assets.
Large-cap: Larger companies worth $5 billion or more like General Electric (NYSE: GE).
Level load: Funds with level loads are sometimes called “C” shares, and they deserve the poor grade. They do not charge a front-end or back-end load. These funds impose a high — and ongoing — 12b-1 fee each year. There’s no getting away from the lofty annual fees. The longer you hold, the more it hurts. A no-load fund may not charge a 12b-1 fee that exceeds 0.25% per 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.
Mid-cap: Medium-size companies worth $1 billion to $5 billion, like Barnes & Noble (NYSE: BKS).
Morningstar style box: Morningstar has broken down the world of domestic mutual funds into small-, medium-, and large-cap funds and by objective — growth, value, or blend. The Morningstar style box looks like a tic-tac-toe board, as such:Once you know which “style box” a fund is in, you can compare it with the other mutual funds that are similarly classified, and in many cases to a relevant index fund.
Portfolio rebalancing : The process of periodically revising a portfolio to restore the asset-class weights for stocks, bonds, and cash to their long-run target values. You do this by selling shares in appreciated asset classes and buying shares in under-represented categories.
Portfolio turnover : A measure of the amount of buying and selling activity in a fund. Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.
Prospectus: Every mutual fund issues a prospectus, which is written in the driest, most confusing, boring language possible. But, in essence, it will describe the investment style of the fund. It answers the following essential questions:
- How much is the fund going to make from managing your money?
- What kinds of returns has the fund delivered for investors in the past, and what does it generally invest in to achieve these results?
Redemption fee: Fee levied for selling shares of your index fund. Usually a fixed percentage of the total value of your fund.
Russell 2000: An index of 2,000 smaller-company stocks.
S&P 500: The 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. Part of the index’s popularity is due to its close association with the largest mutual fund in the world, the Vanguard 500 Index Fund, and Spiders (AMEX: SPY), the first exchange-traded fund (ETF).
Small-cap: Smaller companies worth $250 million to $1 billion, like Hot Topic (Nasdaq: HOTT).
Specific identification: One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, the shares sold are identified by specific purchase date. If you bought shares at different times, you can pick the ones you paid the most for and say that you sold them. That reduces the amount of your capital gain, but you get the same proceeds. This method requires accurate records. You also must notify your fund of the quantities and purchase dates of the shares to be sold. You should also get confirmation from the taxman.
Spiders: S&P Depositary Receipts, otherwise known as “spiders,” represent a single unit of ownership in the SPDR trust. Units of the trust are bought and sold like individual shares of stock and they trade on the American Stock Exchange under the ticker symbol SPY. As the SPDR trust is a pool of money managed to perfectly mimic the Standard & Poor’s 500 Composite Stock Price Index, the price of a unit in the trust is always the current value of the S&P 500 divided by 10.
Statement of Additional Information (SAI): Each fund also submits a Statement of Additional Information that can be obtained by contacting the investment company or by visiting the Securities and Exchange Commission’s website. The SAI goes into much greater detail about many matters found in the prospectus, particularly the tax consequences of fund distributions but generally in a language that only a lawyer could love. If you think there’s any chance you will want to sue your mutual fund company sometime down the road, be sure to read the SAI carefully since it’s legally considered part of the prospectus.
Turnover: Measures how long a fund holds on to the stocks it buys. The longer a mutual fund holds on to a stock and the less trading the fund does, the lower the turnover will be. Since a fund incurs costs every time it buys and sells stocks (just like you do), the lower the turnover, the lower the transaction costs incurred by the fund — and the lower the capital gains taxes. Ideally, Fools like to see funds that practice the “buy and hold” method of investing — those funds are the most index-like. Funds that have a turnover of 100% are essentially buying a completely new set of companies every year. Turnover should ideally be substantially lower than the mutual fund average of about 80%. Index funds have turnover as low as 5%..
Wilshire 5000: The Wilshire 5000 represents the entire U.S. market. (Foreign companies, even those traded on American exchanges, are excluded.) This is the benchmark for the Vanguard Total Stock Market Index Fund (VTSMX). In reality, there are over 7,000 publicly traded U.S. companies, but the “Wilshire 7,123,” or whatever it is right now wouldn’t sound as good.
By Chanchal Ghosh
Account minimum: The minimum amount a Fool must initially invest in a fund, typically between $1,000 and $10,000.
Administrative costs: Costs of record keeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund. The thriftiest funds can keep these costs below 0.20% of fund assets, while the ones who use engraved paper, colorful graphics, and phone answers with highfalutin’ accents might fail to keep administrative costs below 0.40% of fund assets.
Average cost: One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, you determine the average price of all your shares, including those purchased with reinvested dividends and capital gains. That price becomes your cost basis.
Back-end load: Funds with back-end loads are sometimes called “B” shares. These funds impose a contingent deferred sales charge, or CDSC, which is paid at the time of redemption. This fee is generally much higher than a front-end load. The good news is that it declines incrementally to zero over time, and usually disappears in five to eight years. These funds charge 12b-1 fees, which are typically higher than for front-end load funds. These funds may convert “B” shares into “A” shares after the load period has expired.
Blended fund: These mutual funds are generally a combination of growth and value stocks.
Bond index funds: In the world of bond investing, we don’t see any reason to go anywhere but a bond index fund. The top dog is the Vanguard Total Bond Market Fund (VBMFX), which mimics the Lehman Brothers Aggregate Bond Index. There are also short-, intermediate-, and long-term bond funds.
Capital gains: When the fund sells a stock, it incurs short-term and long-term capital gains or losses. Unlike a corporation, a mutual fund does not itself pay income taxes. By law, each year the fund must distribute that year’s net investment income (the total of dividends and interest received less fund expenses) and net realized gain (gains less losses on securities sales) to the fund’s shareholders. That means that you get to foot the taxes due on those gainsFor various reasons, actively managed mutual funds don’t invest all the money at their disposal, but instead maintain cash balances of approximately 8%.
Credit risk : The danger that the issuer of a corporate or municipal bond will experience financial difficulties causing deterioration in credit worthiness, perhaps even a default. Treasury securities are considered free of this risk.
Currency risk : The risk, faced by investors in foreign bond and stock funds, that the foreign currency (say, the US dollar) will appreciate relative to the currencies in which the securities are denominated. When that happens, the funds will realize a currency loss.
Custodian : The independent organization, often a bank, that is responsible for the handling and safekeeping of a fund’s cash and securities.
Disclosure of mutual fund after-tax returns: SEC rule requiring all mutual funds to state explicitly their after-tax returns their prospectuses, starting February 15, 2002.
Dividends & interest: Throughout the year, most mutual funds will receive dividends and interest on the securities they own. If the total passes the fund’s annual expenses, you get the rest. Even if you reinvest those dividends, you have to pay ordinary income taxes on that money. That is to be expected — it’s money you made.
Dow Jones Industrial Average: The Dow Jones Industrial Average is made up of 30 stocks. The index shares for the Dow 30 are commonly called Diamonds (AMEX: DIA).
Expense ratio: The percentage of total assets used to pay for fund expenses.
Funds of funds : These are all-in-one funds that invest in other mutual funds.
First-in, first-out (FIFO): One of three methods to determine the cost basis of the mutual fund shares you sell. Under FIFO, the first shares purchased are considered the first shares sold. This is the IRS’s default method. Because these tend to be the lowest-priced shares, this method usually results in a higher gain. A higher gain means higher taxes.
Front-end load: Funds with front-end loads are sometimes called “A” shares — though they don’t always make the grade. These funds charge an initial sales commission that ranges from 2.0-8.5% of the investment. The fee may also apply to reinvestments of dividends, interest, and capital gains. These funds usually also charge a 12b-1 fee.
Growth: Funds or stocks that carry relatively high valuations, because rapid growth is expected.
Hedging : A general term used to describe any of several risk-reduction strategies. A fund manager might partially hedge against a market decline simply by moving a larger fraction of the portfolio into cash. Alternatively, the manager could sell stock-index futures contracts. If the market falls, the gains on the shorted futures would more or less offset the decline in the portfolio’s value.
High-yield bond : Issues rated below investment grade (as evaluated by credit rating agencies). Although they often promise high income, junk bonds carry high credit risk and might be near or in default. Also known as high-yield bonds, junk securities are particularly sensitive to changes in economic conditions. See Junk bond.
Index Fund : A fund that replicates a particular market index such as the BSE Sensex/CNX Nifty by holding many if not all of the same stocks and in the same proportion as in the benchmark index. With low-cost, passively managed index funds, you’re assured of doing about as well as the benchmark index.
Inflation risk : The danger that the returns from one’s investments will fail to keep pace with increase in the general price level. This is a major problem with secure investments such as Treasury bills, while stocks offset this risk to a large extent.
Investment advisory fee or management fee: Money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund’s assets.
Large-cap: Larger companies worth $5 billion or more like General Electric (NYSE: GE).
Level load: Funds with level loads are sometimes called “C” shares, and they deserve the poor grade. They do not charge a front-end or back-end load. These funds impose a high — and ongoing — 12b-1 fee each year. There’s no getting away from the lofty annual fees. The longer you hold, the more it hurts. A no-load fund may not charge a 12b-1 fee that exceeds 0.25% per 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.
Mid-cap: Medium-size companies worth $1 billion to $5 billion, like Barnes & Noble (NYSE: BKS).
Morningstar style box: Morningstar has broken down the world of domestic mutual funds into small-, medium-, and large-cap funds and by objective — growth, value, or blend. The Morningstar style box looks like a tic-tac-toe board, as such:Once you know which “style box” a fund is in, you can compare it with the other mutual funds that are similarly classified, and in many cases to a relevant index fund.
Portfolio rebalancing : The process of periodically revising a portfolio to restore the asset-class weights for stocks, bonds, and cash to their long-run target values. You do this by selling shares in appreciated asset classes and buying shares in under-represented categories.
Portfolio turnover : A measure of the amount of buying and selling activity in a fund. Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.
Prospectus: Every mutual fund issues a prospectus, which is written in the driest, most confusing, boring language possible. But, in essence, it will describe the investment style of the fund. It answers the following essential questions:
1. How much is the fund going to make from managing your money?
2. What kinds of returns has the fund delivered for investors in the past, and what does it generally invest in to achieve these results?
Redemption fee: Fee levied for selling shares of your index fund. Usually a fixed percentage of the total value of your fund.
Russell 2000: An index of 2,000 smaller-company stocks.
S&P 500: The 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. Part of the index’s popularity is due to its close association with the largest mutual fund in the world, the Vanguard 500 Index Fund, and Spiders (AMEX: SPY), the first exchange-traded fund (ETF).
Small-cap: Smaller companies worth $250 million to $1 billion, like Hot Topic (Nasdaq: HOTT).
Specific identification: One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, the shares sold are identified by specific purchase date. If you bought shares at different times, you can pick the ones you paid the most for and say that you sold them. That reduces the amount of your capital gain, but you get the same proceeds. This method requires accurate records. You also must notify your fund of the quantities and purchase dates of the shares to be sold. You should also get confirmation from the taxman.
Spiders: S&P Depositary Receipts, otherwise known as “spiders,” represent a single unit of ownership in the SPDR trust. Units of the trust are bought and sold like individual shares of stock and they trade on the American Stock Exchange under the ticker symbol SPY. As the SPDR trust is a pool of money managed to perfectly mimic the Standard & Poor’s 500 Composite Stock Price Index, the price of a unit in the trust is always the current value of the S&P 500 divided by 10.
Statement of Additional Information (SAI): Each fund also submits a Statement of Additional Information that can be obtained by contacting the investment company or by visiting the Securities and Exchange Commission’s website. The SAI goes into much greater detail about many matters found in the prospectus, particularly the tax consequences of fund distributions but generally in a language that only a lawyer could love. If you think there’s any chance you will want to sue your mutual fund company sometime down the road, be sure to read the SAI carefully since it’s legally considered part of the prospectus.
Turnover: Measures how long a fund holds on to the stocks it buys. The longer a mutual fund holds on to a stock and the less trading the fund does, the lower the turnover will be. Since a fund incurs costs every time it buys and sells stocks (just like you do), the lower the turnover, the lower the transaction costs incurred by the fund — and the lower the capital gains taxes. Ideally, Fools like to see funds that practice the “buy and hold” method of investing — those funds are the most index-like. Funds that have a turnover of 100% are essentially buying a completely new set of companies every year. Turnover should ideally be substantially lower than the mutual fund average of about 80%. Index funds have turnover as low as 5%..
Wilshire 5000: The Wilshire 5000 represents the entire U.S. market. (Foreign companies, even those traded on American exchanges, are excluded.) This is the benchmark for the Vanguard Total Stock Market Index Fund (VTSMX). In reality, there are over 7,000 publicly traded U.S. companies, but the “Wilshire 7,123,” or whatever it is right now wouldn’t sound as good.
SIR,
This is a very good effort to bring togather all terms that are used frequently but we know very little about them .
i have been investing for last few years in reliance MF and your site ” financialgain” being a blog , even make a notice of a new NFO of reliance infrastucture fund that will end on 23/06/09 , and for your blog i came to know the NFO that i am interested in presently and other relevent information as i have very little knowledge about MF my distributor do that for me so thanks again for your post and your blog with full of information. please try to post article that are though provoking and needful like this.
thankinh you
chaitali ghosh
kolkata
madam,
we are very happy that our effort has given you the ability to make your own decision and the notice of NFO of reliance infrastructure fund but in regard to your suggestion of thoughtful article , we have some commitment to it but we can not claim that every lines and data or articles will be our own as it will be a bogus claim for a person who is not journalist or statistical head of any country. we will try to put up the best research ingredients in our post that surely benefit you all. please keep in touch with financialgain.
with regards
sankar chakraborty
admin.