The Mutual Fund Dictionary

This dictionary defines many of the most common terms associated with investing in mutual funds.

12b-1 Fee
A mutual fund’s 12b-1 fee is the marketing fee that is charged annually by the mutual fund. It is included in the expense ratio.
Asset Class
In Fund Reference parlance, a mutual fund’s asset class is the top-level categorization of the universe of mutual funds. Asset class refers to the type of securities that a mutual fund holds, including common stocks and bonds, but also more obscure assets such as alternatives, commodities, preferred stock, real estate, and VIX, as well as inverse and leveraged securities. Multi-asset funds have core holdings across multiple asset classes.
A mutual fund’s assets are the amount of money held by the fund. It is calculated by summing the values of all of the fund’s security holdings plus cash holdings. Assets are a measurement of the size of a mutual fund, and can be used to compare funds against one another. Changes in asset size come in three different forms — inflows (investors buying shares of the mutual fund), outflows (investors redeeming shares of the mutual fund), or price changes in the fund’s underlying securities.
A mutual fund’s benchmark is the index that corresponds to the fund’s objective. For example, the widely used S&P 500 index is typically the benchmark used by U.S. large-cap stock mutual funds. An actively managed mutual fund is measured against its benchmark and seeks to outperform it. An index (passively managed) fund simply replicates its benchmark.
Capital Gains
A mutual fund’s capital gains are the net gains incurred annually from selling its holdings and result in taxable income for fund shareholders. Long-term capital gains result from selling lots held for at least one year. Short-term capital gains (taxed at a higher rate) result from selling lots held for less than one year.
Closed-End Fund
A closed-end fund is a mutual fund with a fixed number of shares available. The fund cannot be purchased or redeemed directly from the issuer, as with open-end funds. Instead, the fund is traded on an exchange. As a result, the fund usually trades at a premium or discount to its net asset value (NAV).
Expense Ratio
A mutual fund’s expense ratio is the percentage fee on assets charged annually to fund shareholders by the fund issuer.
A mutual fund’s holdings are the underlying assets (i.e., stocks, bonds, etc.) that the mutual fund comprises. The number of holdings varies widely among mutual funds, with some holding only a few securities, while others hold thousands.
Holdings, Long
A mutual fund’s long holdings are the holdings that the fund has long positions in. Most mutual funds comprise long holdings exclusively.
Holdings, Short
A mutual fund’s short holdings are the holdings that the fund has short positions in. Only inverse mutual funds hold short positions. The vast majority of mutual funds avoid these types of holdings.
Holdings, Total
A mutual fund’s total holdings figure is equal to long holdings plus short holdings.
Inception Date
A mutual fund’s inception date is the date on which the fund was first offered. A common time period for performance reporting is “since inception.”
Index Fund
An index fund is a passively managed mutual fund that replicates its underlying benchmark index. See Passive Management for more information.
A mutual fund issuer is the asset management company that offers the mutual fund. For an open-end mutual fund, the issuer is responsible for selling and redeeming shares of the fund.
Load, Deferred
A deferred-load fund is a mutual fund that charges a fee when shares are redeemed before a certain date.
Load, Front-End
A front-load fund is a mutual fund that charges a sales fee upon the purchase of shares. This front-end load is a sales commission paid to the advisor, broker, or planner through which the fund was purchased, and can typically be 5 percent or more. A front-end load can significantly reduce the size of the initial investment.
Load, No
A no-load fund is a mutual fund that does not carry a sales fee.
Management, Active
Active management is one of two distinct types of mutual fund investment styles (the other being passive management). An actively managed mutual fund has one or more mutual fund managers that actively trade holdings in the fund, as the investment objectives of the fund and philosophies of fund management dictate. An actively managed fund attempts to achieve positive alpha and outperform its benchmark. Within the same asset class, an actively managed fund will almost always charge a higher expense ratio than a passively managed fund.
Management, Passive
Passive management is one of two distinct types of mutual fund investment styles (the other being active management). Unlike an actively managed fund that attempts to outperform its benchmark index, a passively managed fund merely replicates its underlying index. For this reason, a fund of this nature is often referred to as an index fund.
A mutual fund manager is the person or group of persons responsible for managing the assets in the fund. A manager of an actively managed mutual fund seeks to outperform the fund’s benchmark, and will engage in active trading of the fund’s holdings according to the management’s investment philosophies.
Manager Tenure
A mutual fund’s manager tenure is the amount of time that the current fund manager has been managing the fund.
Net Asset Value (NAV)
A mutual fund’s net asset value, or NAV, is the value of all of the underlying assets of the mutual fund, per share. A fund’s NAV is akin to a stock’s price. But unlike a stock that is priced continuously throughout the day, a mutual fund’s NAV is calculated only once per day, a short while after the markets have closed.
Open-End Fund
An open-end fund is a mutual fund that can be purchased and redeemed directly from the issuer, as the issuer creates or destroys shares of the fund as demand dictates. Shares are not traded on an exchange, and therefore, the cost of one share of an open-end mutual fund is equal to its net asset value (NAV). It does not trade at a discount or premium.
A mutual fund’s prospectus is literature that details the investment objectives, strategies, risks, performance, distribution policies, management, and fees of the fund, everything that an investor would need to make an informed investment decision. The SEC requires every mutual fund listed in the U.S. to offer a prospectus to potential investors.
Redemption Fee
A mutual fund redemption fee is a fee charged upon the redemption of shares of the fund within a holding period, usually defined as the period that runs from the date of purchase to 30 days later. It is used to discourage short-term trading of a fund.
A mutual fund’s return is calculated by dividing the NAV gain by the previous period’s NAV. It is a measure of a mutual fund’s performance over a select time period. Frequently used time periods for calculating return include year-to-date (YTD), one-year, five-year, and 10-year. This figure can be used to compare the relative performance of funds against one another.
Share Class
A mutual fund’s share class is a designation of how a fund is offered. A mutual fund may offer one or more share classes to investors. Share classes vary by minimum investment, expense ratio, shareholder type (retail, institutional, retirement, etc.), and load fees.
Turnover Ratio
A mutual fund’s turnover ratio is the percentage of a fund’s holdings that have been turned over, or replaced, in the last year. It is a measure of how frequently the fund’s underlying securities are traded and can be used to indicate the tax efficiency of a fund. Typically, a fund with a lower turnover ratio will be more tax efficient.
A mutual fund’s yield is equal to the percentage of assets that are paid in dividends annually.
Yield, 30-Day SEC
A mutual fund’s 30-day SEC yield is equal to the dividends and interest paid by the fund to shareholders in the previous 30-day period, according to SEC filings.
Yield, Trailing 12-Month
A mutual fund’s trailing 12-month yield is equal to the dividends paid by the fund to shareholders in the prior 12-month period.
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