Our mutual fund glossary should help you become familiar with basic terms concerning the many types of mutual funds available, and fees associated with their purchase. For more guidance, be sure to read Do Your Homework Before You Buy for a checklist of critical items to review prior to making your investment.
A Mutual fund is a financial intermediary that allows a group of investors to pool their money together to meet an investment objective.
Types of Mutual Funds
Money Market Funds invest in short-term debt instruments like T-bills or CD’s, and are considered low risk and useful for short term investing. They are flexible and you can usually draw checks strait from your fund account.
Bond Funds invest in government and corporate bonds, and are somewhat more risky than money market funds. They are valuable in retirement accounts to secure diversification.
Municipal Bond Funds invest in tax-exempt bonds issued by state and local governments and are non-taxable.
Corporate Bond Funds invest in debt obligations of United States corporations.
Mortgage-Backed Securities Funds invest in securities backing residential mortgages.
U.S. Government Bond Funds invest in US treasury or government securities.
Stock Funds increase your risk factor and are used for growing money. They include a vast mixture of funds seeking capital gains from small portfolios of fifty up to hundreds of stocks, and can range according to the size of company invested in, goals, market indexes and segments.
Growth Funds invest in stocks believed to be the fastest growing companies in the market. Growth funds rarely provide dividend income and are considered risky investments.
Value Funds invest in large and mid-sized companies that appear to be overlooked or out of favor. These undervalued stocks tend to pay dividends.
Blend Funds are a "blend" of both growth and value stocks.
Large-Cap Funds invest in companies whose market value is large - greater than $9 billion. These "blue-chip" funds tend to be well-established corporations and to pay dividends.
Mid-Cap Funds invest in mid-sized companies whose market value is more in the range of $1 billion to $9 billion.
Small-Cap Funds are a group of stocks chosen to represent a particular segment of the market. Index Funds mimic a chosen index, or a group of stocks chosen to represent a particular segment of the market. Examples of indices include the S&P 500, NASDAQ, and the Russell 2000.
Global Funds invest in both U.S. and International stocks.
Foreign Funds invest primarily outside the U.S.
Country Specific Funds focus on one country or region of the world.
Emerging Markets Funds focus on small developing countries and are considered very risky.
Sector Funds choose to invest in a particular industry or segment of the market, such as automotive, technology, baking, air transportation, biotechnology, health care, and utilities.
Terms Related to Costs of Mutual Funds
When considering fees, focus on both annual expenses and sales charges.
The Expense ratio represents ongoing expense charges that cover costs such as management fees, utilities, rent, mailing expenses, custody fees, etc. They generally vary from 0.15% to over 2.00%.
Sales charges are commissions to agents for sale of funds. They are paid directly by the investor. No load funds have no sales charges.
Front-end fees are also known as “A Shares.” These fees deduct a percentage from the investor before depositing the balance into the fund. Costs may vary from 8.5% to 1% or less on very large deposits. When deposits hit certain break points, the investor pays a smaller commission as a percentage on all the invested funds. For instance, a $10,000 deposit to a fund that charged 5% would result in a $9500 net investment. But, a $100,000 investor might only pay 3%.
Back-end fees are also known as “B Shares” or “Contingent Deferred Sales Charges.” The Fund Company pays a commission to an agent, and then charges an additional annual expense to recover the commission paid. The fee is applied against the entire balance of the account, not just the initial deposit, and is in excess of 1% per year (but can be as high as 6%), and will continue forever. Salesmen favor these funds because there are no break points, so investors receive no credit for larger deposits.
Level loads are also known as “C Shares.” An investor pays a charge of 1% per year to the sales department for as long as he holds the fund. Again, larger deposits get no reduction in fees. Over time this is a very expensive way to buy funds, unless the agent is providing truly heroic service levels on an ongoing basis.
12(b)-1 Fees are applied towards marketing and promotion of additional sales of shares, and may be as high as 1% per year. These charges are usually included in expense ratios. There is really no benefit for paying this expense in order to induce others to invest in the fund.
Additional Distribution Costs are paid by some funds to provide shelf space on the No-Transaction Fee networks of the major discount brokerages, and are about 0.35% per year. These costs are not disclosed well in the prospectus, but account for a major expense difference between funds.
Annual Account charges cover administration costs and range from $10 to $25 per year. These charges help equalize costs between large and small investors and allow funds to charge lower expense ratios. However, they fall very heavily on small investors who should evaluate the impact carefully. A $10 charge is equal to a 1% fee for a $1000 account.
Once you have some of these basics down, build on your knowledge by conducting research and reviewing related articles on our site. Your knowledge can make the difference between a good or bad investment, which could be as drastic, as retiring at 45 rather than 65 or 70!
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