Mutual Fund Investing Terms Defined
July 14, 2011
When it comes to mutual fund investing, all of the terms and acronyms can start to get a little confusing. Whenever you invest in anything, you should understand how it works, as well as know the terms associated with the investment. Mutual funds are fairly straightforward in their operation, but you should know the investment fees that are charged, and understand the terms you might come across. Here are some of the common investment terms associated with mutual fund investing:
12b-1: These are fees that come out of the fund assets to cover the cost of selling fund shares, and to cover expenses related to marketing. “Shareholder service fees” might also be included in 12b-1 fees. These are fees that cover the costs related to providing you with information about your investments. 12b-1 fees are also sometimes called “distribution fees.”
Back-end Load: You pay this sales charge when you sell mutual fund fees. Sometimes, a back-end load is called a “deferred sales charge.” You might also see a contingent deferred sales load. This type of back-end load decreases over time; the longer you are invested in the fund, the lower the load.
Class: A class of mutual fund shares similar investment objectives and policies. Each class (i.e. Class A, Class B, etc.) also has its own fees and distribution policies. Often, results vary according to class.
Closed-End Fund: Shares in this type of fund are not offered continuously to the public. Instead, a fixed number of shares are sold at once, and then the shares are sold on the secondary market. Also called a “closed-end company.”
Exchange Fee: If you transfer from one fund to another in the same group, you might be charged this fee.
Expense Ratio: A percentage that expresses the total operating expenses of the fund in relation to the fund’s average net assets.
Front-end Load: The fee you might pay up front to make a purchase. This fee is usually used to compensate brokers. It is taken out of the amount you are investing, reducing the amount of your principal investment.
Management Fee: A fee paid for the management of the fund. This is the fee paid to those managing the portfolio. It might also be an administrative fee that doesn’t fall under the category of “Other Expenses.”
NAV: This is the “net asset value.” Each day, the fund has to calculate the NAV at least once, per SEC rules. The NAV per share is the funds liabilities subtracted from the assets, with the result divided by the outstanding shares.
No-load Fund: Sales loads aren’t charged on these funds, often (but not always) reducing what you pay for investing. However, it is important to note that other fees are usually charged, so you aren’t investing for “free.”
Open-end Company: A mutual fund is legally referred to an “open-end” company. This type of investment company offers public shares continuously.
Operating Expenses: Costs associated with running a mutual fund. You usually pay a fee to help cover operatin expenses.
Prospectus: This is a publication that describes the mutual fund. It should include information on present and past performance, risks involved in investing, fees and costs, as well as the objectives of the fund.
Purchase Fee: A fee associated with the purchase of shares. This is not a load fee, and it might be charged on top of the load.
Redemption Fee: You pay this fee, sometimes, when you sell your shares. It is not the same as the back-end load, and might be charged in addition.
Sales Charge: Another term for “load.”
SAI: This is the “statement of additional information.” This is information about the fund that might be useful or interesting, but is usually not needed for investors to make an informed decision. You often have to request the SAI if you want to read it.
Total Annual Fund Operating Expenses: A percentage is used to express the total expenses as a portion of the total fund assets.
Of course, this doesn’t cover all the different acronyms and terms regarding mutual funds but at least it’s a start. Are there any investing terms or concepts that you’ve mentioned that you’d like to know more about?
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