Mutual Fund Glossary

A fee that is charged by some mutual funds, which is used to pay marketing, distribution, and service costs, and is paid to the broker. The Financial Industry Regulation Authority (FINRA) allows funds to charge as much as 1.00% annually as a 12b-1 fee.

Alpha can be used to measure the value added or subtracted by a portfolio manager. Investors who understand the definition and benefits of alpha can gain an edge in mutual fund selection.

The portfolio manager of an actively-managed fund tries to beat the market by picking and choosing investments.

Asset classes, with regard to investing, are the three basic types of assets - stocks, bonds and cash.

Asset allocation describes how investment assets are dividend into the 3 basic investment types - stocks, bonds and cash - within an investment portfolio.

You've heard of asset allocation but what about asset location? The placement, in terms of which account, taxable or tax-advantaged, is an important investing decision that has significant impact on an investors returns and taxation.

Class A shares generally have front-end sales charges (also known as a “load”). The load is paid to the advisor for buying the mutual fund on behalf of investors.

Class B shares do not carry front-end sales charges, but carry a contingent deferred sales charge (CDSC) and a higher 12b-1 fee (a 12b-1 fee of 1% is common).

Balanced Funds are mutual funds that provide a combination (or balance) of underlying investment assets, such as stocks, bonds and cash.

Dollar cost averaging is a simple way of periodically and automatically buying shares of investments over time.

Mutual fund flows, which are usually called fund flows, indicate how investors are investing their money in mutual funds. The flows are measures of dollars flowing into or out of mutual funds.

Manager tenure is a key decision factor in buying mutual funds. Don't make the mistake of overlooking manager tenure before investing in a mutual fund.

Contango is when the futures price of a commodity exceeds the spot price. The higher futures price reflects the cost of carry (cost of storing, insuring and financing a commodity) for future delivery of a commodity.

Funds of funds are mutual funds that are made up of other mutual funds.

Mutual fund B shares do not require front-end sales charges, but carry contingent deferred sales charges (CDSC) and have a higher 12b-1 fee (a 1% 12b-1 fee is common) than other mutual fund share classes.

Sector Funds focus on a specific industry, social objective or sector such as health care, real estate or technology.

Cost basis is the purchase price of a mutual fund (or other asset) plus reinvested dividends and reinvested capital gains distributions. The market value less the cost basis is the capital gain or capital loss.

A hedge fund is an investment type that uses a wide range of strategies designed to protect investors from downturns in the market while still participating in positive market environments.

A derivative is a financial instrument that derives its value from an underlying asset such as a stock, bond or commodity.

What are growth stocks? Which mutual funds are best for exposure to growth stocks? What is the best timing for investing? Mutual funds are an ideal means of investing in growth stocks for the average investor. Advanced investors can also use them as tools in their portfolios.

You may have heard about index funds. But what is an index? What are examples of best known indexes?

Often called "the total stock market index," The Wilshire 5000 is the broadest stock market index. But does this mean it's the best overall index for investors?

What is the Russell 2000? This index represents the small-cap stock portion of the equity investment universe. Investors are wise to understand the definition of the Russell 2000 Index and how it applies to investing in mutual funds and ETFs.

What is the MSCI Index? There are many different variations of this foreign stock index. These indexes are followed by other acronyms, such as EAFE, ACWI, IL, DM and EM. What do they mean and how can investors use them?

The Barclays Capital Aggregate Bond Index is the benchmark for most bond funds traded in the US. What is the BarCap Aggregate and how can an investor benefit by using a total bond market fund?

The Russell 3000 is a broad stock market index -- a sampling of approximately 3000 stocks -- that measures performance of the largest US companies. Should investors use a Russell 3000 index fund or ETF or should they use a Wilshire 5000 fund or S&P 500 fund?

ETF is short for "Exchange-Traded Fund." An ETF holds a basket of securities and trades on a stock exchange.

Many investments incur transaction fees when buying shares. For this reason, investors should be aware of these trading costs, especially when making frequent purchases.

There are several different types of risk associated with investing. All of these types of risk generally refer to the risk a particular investment or a group of investments will decline in value and are included under one overall risk, which is market risk.

Understanding the definition of market timing helps an investor determine if this strategy of buying and selling stocks or mutual funds is best for them.

Large cap refers to a categorization of stocks based on market capitalization (number of shares outstanding multiplied by stock price).

The Efficient Market Hypothesis (EMH) essentially says that all known information about investment securities, such as stocks, is already factored into the prices of those securities. Therefore no amount of analysis can give an investor an edge over other investors. But is this hypothesis true in application? Are there certain areas of the...

A discount based on the amount of money invested in a mutual fund that charges a load, or sales charge. The more money an investor commits to a particular mutual fund, or funds within the same fund family, the larger the discount on the sales charge.

Morningstar is best known as a mutual funds research company. But what exactly do they do?

The percentage of fees paid to the mutual fund company to manage and operate the fund, including all administrative expenses and 12b-1 fees. The expense ratio excludes sales charges.

Sharpe Ratio is a useful analytical tool for analyzing mutual funds. Investors who understand the definition and benefits of Sharpe Ratio in their fund research are enabled to build a better portfolio of mutual funds.

An investor is interested in bond immunization if they would like to limit their interest rate risk.

A correction is a market trend that all active investors should know how to recognize. It is important to understand the distinction between a correction and a bear market.

A bull market is an extended period of time where investment security prices are generally rising.

What are mutual fund holdings? Do holdings matter with mutual funds? How many holdings is ideal? The total number of holdings can give an investor a clue to future performance.

A bear market is an extended period of time where investment security prices are generally declining.

The Federal Funds Rate has a far reaching impact on financial markets and the US economy. Understanding the Federal Funds Rate is important for investing and personal finance.

Interest rate risk is the risk of falling bond prices due to the rise in interest rates.

NAV is an acronym for Net Asset Value. The NAV of a fund is the total value of the securities in the fund minus liabilities, divided by shares outstanding.

A mutual fund load is a fee charged when an investor makes a transaction in fund shares. There are also funds that do not charge loads, which are known as “no-load” funds.

A key ingredient to successful investing is knowing yourself. Gauging your risk tolerance is a good way to help you determine how much risk you can tolerate in your portfolio of investments.

It is no coincidence that the mutual funds with the lowest turnover ratios generally produce higher average returns to the investor over time. Learn more about turnover ratio and become a better mutual fund investor.

What is Return on Investment (ROI)? How is ROI calculated? How is ROI used? ROI is used for investment analysis and for making business decisions but it also applies to life decisions.

The S&P 500 Index is a benchmark for the large cap segment of the US equities market. The index includes 500 US-based companies and covers approximately 75% of the US equity market.

See Also: The Best S&P 500 Index Funds

Standard deviation of historical mutual fund performance is used by investors in an attempt to predict a range of returns for various mutual funds.

Style drift occurs when a mutual fund's holdings "drift" from one asset class (or investment style) to another

The summary prospectus rules require that funds provide investors with a brief summary (generally three to four pages) – in plain English – of the key information that will allow investors to make informed investment decisions.

The mutual fund tax cost ratio measures the amount of a fund's return that is lost due to taxes paid on mutual fund capital gains distributions.

Unit investment trusts (UITs) may be the least understood, and certainly least utilized, of all of the US registered investment companies. What are these unit investment trusts?

A mutual fund investor can use beta in planning their fund selection to determine volatility of the fund and to compare its sensitivity in movement to the overall market.

R-squared (R2) is a statistical measure that investors can use to determine a particular investment's correlation with a given benchmark.

ZIRP is an acronym for Zero Interest Rate Policy. What is ZIRP and how does it affect the economy and financial markets?

What is the Dow Jones Industrial Average and why should investors care about it? Although this index only represents 30 large industrial companies, the Dow Jones index still has significant relevance.