Glossary of Terms
Annual and Semiannual Reports—Summaries that a mutual fund sends to its shareholders
that discuss the fund’s performance over a certain period and identify the securities in the fund’s
portfolio on a specific date.
Appreciation—An increase in an investment’s value.
Asked or Offering Price—(As seen in some mutual fund newspaper listings, see p. 32.) The price at
which a mutual fund’s shares can be purchased. The asked or offering price includes the current net asset
value per share plus any sales charge.
Assets—The current dollar value of the pool of money shareholders have invested in a fund.
Automatic Reinvestment—A fund service giving shareholders the option to purchase additional shares
using dividends and capital gain distributions.
Average Portfolio Maturity—The average maturity of all the bonds in a bond fund’s portfolio.
Bear Market—A period during which security prices in a particular market (such as the stock market)
are generally falling.
Bid or Sell Price— The price at which a mutual fund’s shares are redeemed, or bought back, by the
fund. The bid or redemption price is usually the current net asset value per share.
Bond—A debt security, or IOU, issued by a company, municipality, or government agency. A bond
investor lends money to the issuer and, in exchange, the issuer promises to repay the loan amount on a
specified maturity date; the issuer usually pays the bondholder periodic interest payments over the life of
Broker-Dealer (or Dealer)—A firm that buys and sells mutual fund shares and other securities from
and to investors.
Bull Market—A period during which security prices in a particular market (such as the stock market)
are generally rising.
Capital Gains Distribution—Profits distributed to shareholders resulting from the sale of securities
held in the fund’s portfolio.
Closed-End Fund—A type of investment company that has a fixed number of shares which are publicly
traded. The price of a closed-end fund share fluctuates based on investor supply and demand. Closed-end
funds are not required to redeem shares and have managed portfolios.
A Guide to Understanding Mutual Funds 32
Commission—A fee paid by an investor to a broker or other sales agent for investment advice and
Compounding—Earnings on an investment’s earnings. Over time, compounding can produce significant
growth in the value of an investment.
Contingent Deferred Sales Load (CDSL)—A fee imposed when shares are redeemed (sold back to
the fund) during the first few years of ownership.
Credit Risk—The possibility that a bond issuer may not be able to pay interest and repay its debt.
Custodian—An organization, usually a bank, that holds the securities and other assets of a mutual fund.
Depreciation—A decline in an investment’s value.
Diversification—The practice of investing broadly across a number of securities to reduce risk.
Dollar-Cost Averaging—The practice of investing a fixed amount of money at regular intervals,
regardless of whether the securities markets are declining or rising.
Exchange Privilege— A fund option enabling shareholders to transfer their investments from one fund
to another within the same fund family as their needs or objectives change. Typically, fund companies allow
exchanges several times a year for a low or no fee.
Exchange-Traded Fund—An investment company, typically a mutual fund or unit investment trust,
whose shares are traded intraday on stock exchanges at market-determined prices. Investors may buy or
sell ETF shares through a broker just as they would the shares of any publicly traded company.
Expense Ratio—A fund’s cost of doing business—disclosed in the prospectus—expressed as a percent
of its assets.
Face Value—The amount that a bond’s issuer must repay at the maturity date.
Family of Funds—A group of mutual funds, each typically with its own investment objective, managed
and distributed by the same company.
Financial Industry Regulatory Authority (FINRA) —A self-regulatory organization with authority
over firms that distribute mutual fund shares as well as other securities.
401(k) Plan—An employer-sponsored retirement plan that enables employees to make tax-deferred
contributions from their salaries to the plan.
403(b) Plan— An employer-sponsored retirement plan that enables employees of universities, public
schools, and nonprofit organizations to make tax-deferred contributions from their salaries to the plan.
A Guide to Understanding Mutual Funds 33
457 Plan—An employer-sponsored retirement plan that enables employees of state and local
governments and other tax-exempt employers to make tax-deferred contributions from their salaries to the
Hedge Fund—A private investment pool for wealthy investors that, unlike a mutual fund, is exempt from
Hybrid Fund—A mutual fund that invests in a mix of equity and fixed-income securities.
Income— Dividends, interest and/or short-term capital gains paid to a mutual fund’s shareholders.
Income is earned on a fund’s investment portfolio after deducting operating expenses.
Independent Director—An individual who cannot have any significant relationship with a mutual
fund’s adviser or underwriter, in order to better enable the fund board to provide an independent check on
the fund’s operations.
Individual Retirement Account (IRA)—An investor-established, tax-deferred account set up to hold
and invest funds until retirement.
Infl ation Risk—The risk that a portion of an investment’s return may be eliminated by inflation.
Interest Rate Risk—The possibility that a bond’s or bond mutual fund’s value will decrease due to rising
Investment Adviser—An organization employed by a mutual fund to give professional advice on the
fund’s investments and asset management practices.
Investment Company—A corporation, trust, or partnership that invests pooled shareholder dollars in
securities appropriate to the organization’s objective. Mutual funds, closed-end funds, and unit investment
trusts are the three types of investment companies.
Investment Objective—The goal that an investor and mutual fund pursue together (e.g., current
income, long-term capital growth, etc.).
Issuer—The company, municipality, or government agency that issues a security, such as a stock, bond,
or money market instruments.
Large-Cap Stocks—Stocks of large-capitalization companies, which are generally considered to be
companies whose total outstanding shares are valued at $10 billion or more.
Liquidity— The ability to readily access invested money. Mutual funds are liquid because their shares can
be redeemed for current value (which may be more or less than the original cost) on any business day.
Load Fund—A fund that imposes a one-time fee—either when fund shares are purchased (front-end
load) or redeemed (back-end load)—or a fund that charges a 12b-1 fee greater than 0.25 percent.
A Guide to Understanding Mutual Funds 34
Long-Term Funds—A mutual fund industry designation for all funds other than money market funds.
Long-term funds are broadly divided into equity (stock), bond, and hybrid funds.
Management Fee—The amount paid by a mutual fund to the investment adviser for its services.
Maturity—The date by which an issuer promises to repay the bond’s face value.
Mutual Fund—An investment company that buys a portfolio of securities selected by a professional
investment adviser to meet a specified financial goal. Mutual fund investors buy shares in the fund that
represent ownership in all the fund’s securities. A mutual fund stands ready to buy back its shares at
their current net asset value, which is the total market value of the fund’s investment portfolio, minus its
liabilities, divided by the number of shares outstanding. Most mutual funds continuously offer new shares
Net Asset Value (NAV)—The per-share value of a mutual fund, found by subtracting the fund’s liabilities
from its assets and dividing by the number of shares outstanding. Mutual funds calculate their NAVs at
least once daily.
No-Load Fund—A mutual fund whose shares are sold without a sales commission and without a 12b-1
fee of more than .25 percent per year.
Open-End Investment Company—The legal name for a mutual fund, indicating that it stands ready to
redeem (buy back) its shares from investors on any business day.
Operating Expenses— Business costs paid from a fund’s assets before earnings are distributed to
shareholders. These include management fees and 12b-1 fees and other expenses.
Portfolio—A collection of securities owned by an individual or an institution (such as a mutual fund)
that may include stocks, bonds, and money market securities.
Portfolio Manager—A specialist employed by a mutual fund’s adviser to invest the fund’s assets in
accordance with predetermined investment objectives.
Portfolio Turnover—A measure of the trading activity in a fund’s investment portfolio—how often
securities are bought and sold by a fund.
Prepayment Risk—The possibility that a bond owner will receive his or her principal investment back
from the issuer prior to the bond’s maturity date.
Principal—see Face Value.
Prospectus—The official document that describes a mutual fund to prospective investors. The
prospectus contains information required by the SEC, such as investment objectives and policies, risks,
services, and fees.
A Guide to Understanding Mutual Funds 35
Quality—The creditworthiness of a bond issuer, which indicates the likelihood that it will be able to repay
Redeem—To cash in mutual fund shares by selling them back to the fund. Mutual fund shares may be
redeemed on any business day. You will receive the current share price, called net asset value, minus any
deferred sales charge or redemption fee.
Reinvestment Privilege— An option whereby mutual fund dividends and capital gain distributions
automatically buy new fund shares.
Risk/Reward Tradeoff— The investment principle that an investment must offer higher potential
returns as compensation for the likelihood of increased volatility.
Rollover—The shifting of an investor’s assets from one qualified retirement plan to another—due to
changing jobs, for instance—without a tax penalty.
Sales Charge or Load— An amount charged for the sale of some fund shares, usually those sold by
brokers or other sales professionals. By regulation, a mutual fund sales charge may not exceed 8.5 percent
of an investment purchase. The charge may vary depending on the amount invested and the fund chosen.
A sales charge or load is reflected in the asked or offering price (see Asked or Offering Price).
Securities and Exchange Commission (SEC)—The primary U.S. government agency responsible for
the regulation of the day-to-day operations and disclosure obligations of mutual funds.
Series Fund—A group of different mutual funds, each with its own investment objective and policies,
that is structured as a single corporation or business trust.
Share Classes (e.g., Class A, Class B, etc.)—Represent ownership in the same fund, but charge
different fees. This can enable shareholders to choose the type of fee structure that best suits their
Shareholder—An investor who owns shares of a mutual fund or other company.
Short-Term Funds— Another term for money market funds.
Small-Cap Stocks— Stock of small-capitalization companies, which are generally considered to be
companies whose total outstanding shares are valued at less than $1.6 billion.
Spread—The difference between what you pay for a stock or bond and what the security dealer pays for it.
Statement of Additional Information (SAI)—The supplementary document to a prospectus that
contains more detailed information about a mutual fund; also known as “Part B” of the prospectus.
Stock—A share of ownership or equity in a corporation.
A Guide to Understanding Mutual Funds 36
Total Return—A measure of a fund’s performance that encompasses all elements of return: dividends,
capital gains distributions, and changes in net asset value. Total return is the change in value of an
investment over a given period, assuming reinvestment of any dividends and capital gains distributions,
expressed as a percentage of the initial investment.
Transfer Agent—The organization employed by a mutual fund to prepare and maintain records relating
to shareholder accounts.
12b-1 Fee— A mutual fund fee, named for the SEC rule that permits it, used to pay for broker-dealer
compensation and other distribution costs. If a fund has a 12b-1 fee, it will be disclosed in the fee table
of a fund’s prospectus.
Underwriter—The organization that sells a mutual fund’s shares to broker-dealers and investors.
Unit Investment Trust (UIT)—An investment company that buys and holds a fixed number of shares
until the trust’s termination date. When the trust is dissolved, proceeds are paid to shareholders. A UIT has
an unmanaged portfolio. Like a mutual fund, shares of a UIT can be redeemed on any business day.
Withdrawal Plan—A fund service allowing shareholders to receive income or principal payments from
their fund account at regular intervals.
Yield—A measure of net income (dividends and interest) earned by the securities in the fund’s portfolio
less fund expenses during a specified period. A fund’s yield is expressed as a percentage of the maximum
offering price per share on a specified date.