The purpose of this page is to provide simple definitions to the terminology encountered within a mutual fund's prospectus. This page is intended to be used as an aid in understanding some of the key terms in a prospectus. This should not be used a substitute for reading a mutual fund prospectus. Terms are listed alphabetical order. If you are looking for a specific term, scroll down to the appropriate area.

[Mutual Funds Made Simple] -Learn about the basics of mutual funds.

A

Annualization - A method by which different annual rates or short term returns. may be compared.

Annual Report - The yearly record of a mutual fund's performance which is distributed to share holders. The report contains information about the fund's earnings and operations. Repports may also come semi-annually or monthly.

Application - The form that must be completed and sent through the mail when purchasing shares of a mutual fund. The application is usually within the prospectus. It is essential to complete all the information.

Appreciation - The increased value of one asset held by the mutual fund, or by the total assets held by the mutual fund over a period of time.

Asset allocation - A system or method of investing that distributes assets to a broad array of investments.

B

Bear market - A period of time in which the market, or securities in general lose money.

Benchmark - A reference point that is chosen for the purposes of comparing other related values.

Beta - A system by which the volatilities of mutual funds may be compared. For example, the Standard & Poor 500 Index has a volatility designated by the number 1. If a particular mutual fund has a beta that is less than 1, then that mutual fund can be expected to be less volatile than the S&P 500 index. In this way the differnt volatilities of differnt mutual funds may be compared.

Blue chip stock fund - A mutual fund that consists of a portfolio of large or well known companies for the purposes of achieving growth.

Bottom line - Refers to the value of an investment after taxes.

Broker - A salesman who sells stocks, bonds or even mutual funds. Only licnsed individuals may sell these items. Very few mutual funds require the middleman of a broker for purchase. Most fund shares may be purchased directly through the mail.

Brokerage firm - A firm that sells securities. Brokerage firms are most known for the sale of stock.

Bull market - A good market in which prices of securities increase greatly over a specific period time.

C

Capitalization - The value of a mutual fund derived by the multiplication of the fund's share price by the number of outstanding shares. Most often, this is applied in order to detremine the value of specific companies.

CD - Certificate of deposit. A vehicle of savings which provide a fixed interest rate to the CD owner. Early withdrawals before the time of maturity are financially penalized.

Closed-end fund - A type of mutual fundthat offers only a fixed amount of shares, usually sold through a brokerage firm bya broker. Most mutual funds are not closed-end funds, they offer unlimited shares and may be purchased and reedemed directly by the individual through the mail by check.

Closing price - The price of a stock or other security at the end of the day, after the final trade.

Commercial paper - Usually they are short term investments similar to bonds, issued by a company that needs to raise money; and is willing to pay an intrest rate. These are components to some mutual funds.

Common stock - The shares offered by a corporation enabling a shareholder partial ownership of the company, in addition to privledges such as voting rights, and recieving dividends.

Confirmation notice - A notice sent to the investor that his payment has been recieved. This notice provides information concerning the value of the shares and the ammount of shares purchased. It also contains other information such as the account number.

Consumer Price Index - The index compiled by the U.S. Bureau of Labor, a govenmental agency, which follows the cost of living by following the changes in price of basic goods and services over time. This index measures inflation.

Contra fund - A fund with an investing strategy that seeks the stock of out of favor companies, with good fundamentals such as low debt or good potential earnings, with the belief that the stock will increase in value.

Credit risk - The risk of default, in which a bond issuer may not make the complete payments. Any bond mutual fund may risk loss from credit risk. Bonds are rated From a scale of A to C according to the risk of default of the company that has issued them.

D

Diversification - A mutual fund portfolio that owns a variety of securities in order to spread the risk so that the risk of loss is reduced. Mutual Funds are the best method of diversifivcation because their portfolios consist of a variety of securities, unless otherwise noted.

Distributions - The amount of money per share of a mutual fund that is paid to shareholders, from the income or interest earned from the securities contained in the portfolio.

Dividends - Income distibuted to share holders. Dividends can be recieved from the ownership of stock or from mutual funds. Mutual fund share holders have the option to reinvest dividends automatically in order to purchase more shares.

Dollar- cost averaging - A system of investing in which an individual reinvests money into the same mutual fund on a regular basis; usually monthly. Often investors can choose an option in which money is automatically withdrawn from their banking acount and invested into the mutual fund at a specified time of the month.

E

Equity - A stock or the interest and capital gains recieved from the ownership of a stock.

Execution - The term used to describe the completion of a transaction in which a stock is sold by a broker and purchased by a shareholder.

Expenses - Fund shareholders pay expenses that go towards the operation and management of the fund. Expenses are often less than 1% of the investor's holdings in the value. In comparison, mutual funds are much less than that of a broker. Many investors choose to compare expenses as a factor in choosing which fund to invest in.

F

Fees - See Expenses

Family - A mutual fund company which offers investors a choice of two or more mutual funds; with different objectives or investment strategies. Often shareholders have the option to easily exchange shares between different funds in the same family over the phone with no fee.

Futures - A contract in which a stock, or commodity is purchased with the intention of reselling it, yet not recieved at time of purchase, with the hope that the price will increase once it is recieved; so that it can be sold at a profit. This is a practice commonly used by fund managers of aggressive growth mutual funds.

H

Hedging - A strategy used in conjunction with the buying and selling of futures, in which a manager of a mutual fund may purchase a security with the belief that the price will go up, and that the shares may be sold at a profit.

I

Index - An average of stock prices, or mutual funds, used for the purposes of comparing.

Index fund - A fund that specializes in the purchase of securities that match or represent a specific index. For example, an index 500 fund is a fund that seeks to mimic the returns represented by the index 500. Some mutual funds claim to be enhanced index funds, that seek to outperform the index to which they are following.

International fund - A type of mutual fund that invests in foregin stock only.

Investor services - Services offered to mutual fund share holders such as telephone transaction services, and automatic withdrawal plans.

IRA - Individual Retirement Account. This type of account is kept by individuals whose intention it is to save for retirement while protecting a part of their income from taxes. Only $2,000 per year may be put away into IRA account, removing the money before 591/2 years will result in financial penalties. Money put into an IRA may be invested into mutual funds.

K

Keogh - 401 k account. A plan used instead of a company pension plan. In a plan such as this, an employee chooses to put a fraction of his monthly paycheck 1-15% into the account, and the employer will match that amount and also put it into the employee's account. The money may in turn, be invested into a mutual fund. The money is not taxed. If the money is withdrawn prior to the specified age, there will be financial penalties. A keogh account is an account in which self employed individuals may shelter up to 25% of their income or up to $30,000 each year from taxes.

L

Large-cap - A large sised company, or a mutual fund that invests in the stock of large, established well known companies.

Liquidity - The degree to which an investment may be quickly sold in exchange for cash. Mutual funds a a liquid investment; at any time, shares may be reedemed. A 30 year savings bond is not liquid. It can not easily be sold until the 30 year maturity date is reached.

Loaded fund - A mutual fund that charges an extra sales fee on top of other fees. Most good mutual funds are not loaded. Nevertheless, there may be cases when an investor feel a loaded fund is the best choice. Loads do not mean a fund is managed better.

Long run or long term - A period of time in which short term volatility or risk of the market does not play a significant role. Over the long term, the stoch market historically has increased. Long term can be considered a time period of ten years or more.

M

Manager - A mutual fund is run by one manager, or a team of managers , professionals who decide upon the mutual fund's portfolio. Holdings are chosen according to the goal of the mutual fund, as stated in the prospectus, and according to the manager's unique investment strategy.

Market - Refers to the exchanges, traders and investors involved in the tranfer of goods and services and securities, as in the stock market. Or, the term may refer to goods and services in general, and the producers who produce them, and the consumers who buy them.

Market risk - Refers to the potential of loss that is possible, as a result of the shoort term volatility of the stock market. Owning mutual funds, due to their diverification, shield an investor to some market risk that a stock holder may be vulnerable to.

Market timing - A method of investing in which an investor may try to predict good or bad markets for the purposes of determining when to buy or sell a specific security or mutual fund.

Megafund - A mutual fund that holds shares of other mutual funds, and not stocks themselves.

Mid-cap - A medium sised company or a mutual fund that invests almost exclusivley in medium sised companies. A company's size is usually determined by the dollar value of its assets/earnings.

Minimum investment - Most funds have an initial minimum investment that may range from $50- $2,500. If at any time, the balance fall below the minimum due to withdrawal or loss in market value, a yearly fee (usually $10-$50) may be imposed.

Money market instruments - Include short term investments such as CDs, T-bills, and short term comercial bonds. Money market mutual funds invest in these types of short term investments; as a result, there is little to no risk of losing any portion of the principle investment. A money market mutual fund should not be confused with a money market deposit account, which is FDIC insured.

N

Net asset value (NAV) - The value of a mutual fund share. Determined by dividing the total value of the fund's assets by the number of outstanding shares. This value is caalculated daily by the fund.

Net assets - The total amount of money that comprises the mutual fund's holdings. Small funds have millions of dollars while large funds may have over 50 billion dollars. Sometimes a manager may close a fund to new investors if its size is large.

No-Load mutual fund - A fund that does not charge a sales fee. Most funds are not loaded.

No minimum fund - A mutual fund with no minimum investment requirement.

O

Offering price - The price to buy one share of a specific mutual fund.

Ongoing expenses - Fund exppenses incurred annualy include management fees. Sometimes a mutual fund may include 12b-1 fee for advertising. Fees are usually a very small percentage (less than 1.5%) of an investor's total account. Nevertheless, some funds may have high fees, greater than 3%. Higher fees do not neccessarily mean better permormance, but high fees may be to pay for extra services.

Open-end mutual fund - A mutual fund that does not have a fixed number of shares (as does a closed end fund or stock). The mutual fund will offer as many shares as investors are willing to buy. These funds need not be bought through a broker. Most mutual funds are open ended unless otherwise noted.

P

Penny stock - An inexpensive stock, also known as micro-cap stock. This term usually refers to stocks costing less than $1 per share, but it may also refer to stocks under $5.00 too. Many aggressive growth mutual funds have portfolios consisting of many cheap stocks, with the belief that cheap stocks have greater growth potential.

Performance - How a fund has done over time. Often past performance is used as an aid to determine future performance. Past performance is not a guarenteed indicator of future performance.

P/E ratio - Ratio of the price of a stock to the total earnings of the company. Companies with very high ratios of greater than 30 are considered to be overpriced. Company stock with a low ratio are considered to be undervalued, and potentially good investments. Mutual funds with a value type of investment strategy seeks a portfolio consisting of stocks with low ratios with the expectation that they will increase in price.

Portfolio - The collection of all the holdings of a mutual fund, such as bonds, and stocks. In a mutual fund's annual report, a list of the fund's current portfolio will usually be contained.

Preferred stock - A type of shares offered by a company, which pay a pre-stated dividend, before common stock dividends are issued. The benefits of owning preferred stock are realized if the company ever goes bankrupt. If this occurs, prefered stock share holders recieve their money first. Common stock holders may not recieve any money, if none is remaining after paying preferred stock holders.

Prospectus - A document, usually in the form of a booklet, that provides information about a specific mutual fund; such as the funds investment and redemption policies. The prospectus, according to law, must always be accompanied with the application. Prospective investors should always read the mutual fund's prospectus before sending money.

R

Regular account - A mutual fund account that is not for the purposes of saving for retirement as in a 401-k or IRA account.

Risk tolerance - The willingness of an investor to tolerate the risk of losing money for the potential to make money.

S

SAI - Statement of additional information can be requested in addition to the prospectus. It gives additional information.

SEC - The securities and exchange commision, a regulatory agency of the federal government which regulated the sale of stocks and mutual funds. They do not however guarentee that an investor will not lose money from an investment. The number for their headquarters is: (202) 942-7040.

Sector funds - A type of mutual fund that invests in the stocks of companies representing a specific industry, such as technology, utilities or health care.

Securities - The holdings of a mutual fund, such as stocks or bonds.

Shareholder - What an investor who holds mutual fund or stock shares is called.

Short term or short run - The period of time in which market volatility may subject an investment to market risk of loss. The short term may be considered to be a period of two years or less.

Small-cap - Refers to either small companies, or mutual funds which hold the stock of small companies. Often small cap mutual funds have higher volatility, but also higher potential for greater capital gains. Many small cap funds come under the heading of an aggresive growth mutual fund.

Stock symbol - Also refered to as a ticker symbol. It is the abbreviation that represents the name of a stock or a mutual fund. When looking at a ticker tape or newspaper for the current value of a stock or mutual fund share, you must know its alphabetical symbol.

T

Taxes - Federal taxes are imposed at the redemption of all capital gains. The capital gains tax is 28%.

12b-1 fee - An extra fee charged by some mutual fund managers inorder to pay for the costs involved in advertising. The fee may vary from year to year. It can be about .25% of the total investment held per shareholder.

V

Volatility - The degree to which a mutual fund's share price will change in value.

W

Withdrawal - To reedem shares of a mutual fund or stock. In a mutual fund, partial or full redemptions may be made over the phone. Some funds may impose an extra redemption fee to discourage market timers from pulling their money immediatly after investing. If this is a fund's policy, it will be stated in the prospectus.

Y

Yield - Income or dividends recieved from a security or mutual fund.

If you see a definition not listed that you wish to see, please write

Last Revised 10, May 1996 by P.L.Weiss

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