Mutual Fund Glossary

actively managed funds: With these funds, managers pick stocks or other securities with a certain goal in mind, like beating a particular index or achieving a certain level of return while assuming a certain level of risk. Because there's stock-picking going on, these funds tend to have higher expense ratios, and higher taxes, than passively managed funds).

alpha: Tells you how a fund is actually doing compared to its beta. If the beta is 1.5, and the fund rises 15% more than the market, then the alpha is zero.

back-end load: A load paid when you redeem your shares. Most funds drop the load if you hold for a specified period of time, usually several years.

beta: This volatility measure is supposed to give you some sense of how far the fund will fall if the market takes a dive and how high the fund will rise if the bull starts to climb. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 means less volatile. So say your fund gets a beta of 1.15 -- it has a history of fluctuating 15% more than the S&P. If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more. Problem: For funds that don't correlate well to the S&P, beta just doesn't tell you much.

blended fund: These mutual funds include a combination of growth and value stocks. Growth stocks typically have a high valuation because investors expect rapid growth. Conversely, value stocks have low valuation because slower growth is anticipated.

capital gains distribution: A payment to investment company shareholders of profits realized on the sale of its securities. Equity funds usually pay out these amounts once a year, typically in December, while bond funds often include capital gains in their monthly distributions. Many funds allow automatic reinvestment of capital gains, instead of distribution.When the fund sells securities it has owned for more than 12 months (18 months after 7/28/97), the profits, or losses, are distributed among and passed through to the shareholders. These gains are taxable at the capital gains rate. If the securities sold were held for less than one year, the distributions would be taken into ordinary income and taxed at your individual rate.

classes of shares: Various classes of a single portfolio are distinguished by the type of sales charge they levy. In general: -- Class A shares carry a front-end load. -- Class B shares carry a back-end load (also known as a contingent deferred sales charge). -- Class C shares carry an ongoing charge (usually in the form of an annual 12b-1 charge).

closed-end funds: Closed-end funds are baskets of stocks that are grouped according to an investment objective and overseen by a manager. But unlike open-end funds, which continue to increase their asset base by selling to new shareholders, closed-end funds bring in assets by selling a fixed number of shares through an initial offering. After the initial sale, the closed-end fund's shares trade like stocks on exchanges like the NYSE or the AMEX. Low demand for a fund can cause closed-end shares to trade at discounts to net asset value. High demand can create premiums to NAV.

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.

front-end load: A load paid when you first invest.

global funds: Invest in stocks of companies based both inside and outside the U.S. Since a fund needs only to have 25% of its assets in overseas companies to be considered global, this is not the kind of fund you want for strict asset allocation. Rather, it's great if you like the manager and have faith in his freedom to find good investments around the globe.

growth funds: Funds that invest in companies believed to have steadily growing earnings. On the extreme, growth investors pay little attention to price and focus almost entirely on earnings growth. Prototypical example: Gary Pilgrim, PBHG Growth.

hedge funds: A fund that can go long or short stocks, hence the hedge connotation. But it's is different from a regular fund in the way its managers are compensated. Regular money managers get a percentage of the assets. Hedge fund managers get a percentage of the assets and take 20% of the gains, both realized and unrealized.

international funds: International funds invest in stocks of companies based outside the U.S. This is what you want if you are diversifying your portfolio and are looking specifically for overseas exposure. Sixty-five percent of the fund's total assets must invested in companies based outside the U.S. for a fund to qualify, under the Lipper Analytical Services definition.

level load: An annual load that usually is lowered gradually based on the number of years you keep your money in the fund.

Lipper fund categories:

• Micro-cap funds: Funds that invest primarily in companies with market capitalizations of less than $350 million.
• Small-cap funds: Funds that invest primarily in companies with market capitalizations of less than $1 billion.
• Mid-cap funds: Funds that invest primarily in companies with market capitalizations of less than $5 billion.
• Growth funds: Funds that normally invest in companies whose long-term earnings are expected to grow faster than the market.
• Growth & income funds: Funds that combine growth in earnings and an income requirement for dividends.
• Equity income funds: Funds that seek high income and growth by investing at least 60% of their portfolio in equities.
• Capital appreciation: Funds that aim at 100% maximum capital appreciation, through such moves as leveraging, using options and going into cash.

load: Also called a sales charge, this is a fee imposed on mutual fund buyers that is generally divided between the fund family and the financial advisor who sells the fund, like a broker. Loads can be as high as 8% but usually range from 2%-5%. Investors should realize that a hefty expense ratio (1.4% is average though it varies by fund objective) can be a lot more damaging if you're a long-term holder, as that bites into your returns every year. Most loads, in contrast, are a one-time charge.

management fee: This is a fee that the fund pays to its investment advisor for managing the portfolio. It is usually 0.5%-1% of the fund's total assets annually and is included in the overall expense ratio.

minimum investment: Minimum Initial indicates the minimum deposit required to open a regular or IRA/SEP/Keogh tax-deferred account with the mutual fund. Minimum subsequent indicates the minimum required to make deposits in an already opened regular or tax-deferred account with the mutual fund.

momentum funds: Momentum has gotten a reputation as a nasty word, partly because the strategy hasn't been successful in the past couple of years, and partly because it is an investment strategy focused on stock movement more than the underlying companies. Convene the Un-American Activities Committee! In momentum investing, money managers are looking for stocks with earnings and/or price momentum in the relatively short term, with little regard for the underlying company or its value compared with the stock price.

money market fund: A money market fund is a mutual fund that invests only in money market investments. Most money funds allow limited check writing and keep your principal constant but vary the interest rate. An investment in a money market fund is not insured or guaranteed by the U.S. government. There is no assurance that the fund will maintain a $1 share price. This is a market for short-term debt instruments such as certificates of deposit, commercial paper, banker's acceptances, Treasury bills, and discount notes of the Federal Home Loan Bank and the Federal National Mortgage Association, among others. Elements of the money market have two things in common: safety and liquidity.

Morningstar risk rating: Measures how often a fund loses money compared with the T-bill and the fund's investment class. 1.0 is the average for a class, so if a fund has a rating of 0.6, it is 40% less risky than its peers. If its rating is 1.5, it is 50% more risky than the funds in its class.

mutual fund: A mutual fund is a pool of money invested in a group of securities owned by a group of investors, and managed by an investment company. It is managed by investment professionals who make buy and sell decisions for the group. Investors choose to purchase shares in mutual funds for a couple of reasons: they can diversify their holdings more easily with a smaller amount of money (because the mutual fund has the money to buy shares in many different types of securities); and they can rely on investment professionals to make trading decisions for them.They offer investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are investment companies regulated by the Investment Company Act of 1940.

NAV: Net Asset Value. The current value of a share in a mutual fund. It's just the fund's assets minus liabilities divided by the number of outstanding shares. Most funds calculate their NAV after the close of trading each day. For conventional mutual funds, your share is worth the day's NAV, but in closed-end mutual funds, the NAV and the market price aren't usually the same. That's because closed-end fund shares trade like stocks, from investor to investor, and sell at a premium or discount to their NAV, depending on a variety of factors (such as transaction costs and investor expectations).

net assets: The total assets (net of liabilities) held in a fund.

net fund flows: Tracked by several different companies, fund flows represent the amount of new money coming into mutual funds less the amount of money "redeemed" by investors. Though a decidedly inexact science, fund flow tracking has become a cottage industry, as market watchers use the figures to measure public sentiment toward the market and liquidity.

no-load: Funds that do not charge a load. Note: Funds can impose a sales charge of up to 1% and still be considered no-load.

objective: The fund's investment strategy category as stated in the prospectus. There are more than 20 standardized categories.

open-end funds: The vast majority of mutual funds are open-end funds, which can issue new shares all the time in response to investor demand. (In contrast, closed-end funds have a set number of shares outstanding.) Sometimes the fund family will close these funds, both to new and current investors, when their asset size becomes too big to manage efficiently.

passively managed funds: This term generally refers to index funds. The manager is not actually exercising discretion in his choice of stocks. Rather, he is investing in a basket of stocks that mirrors a predetermined index, like the S&P 500. Because there's less work involved, and little portfolio turnover, passive management generally generates less in expenses and taxes than active management. At the same time, their goal is to match the index, not beat it. Most well known for its passive or index funds: Vanguard.

regional fund: An international mutual fund that invests in securities from one particular area, such as Latin America or the Far East.

reinvested dividends: Fund investors have the option of receiving payouts for any dividends generated by the securities in funds they own, or reinvesting the income represented by the dividends in the form of purchases of new shares of the fund. Most reinvest by checking a little box when they buy the fund.

sales charge: A sales charge is the fee charged when shares are purchased (front end) or redeemed (CDSC). Also called a load. Most of the sales charge is returned to the broker/dealer as commission; a smaller portion is retained by the mutual fund company. Reinvested dividends and capital gains generally are not assessed a sales charge.

share classes: A load fund will often offer several share classes, each with a different load and expense-ratio combination. The idea is to give investors a choice of whether they want to get smacked with a load right away or whether they want to put off the inevitable.

Sharpe ratio: A measure of a portfolio's excess return relative to the total variability of the portfolio. Related: treynor index This formula, developed by Nobel Laureate Bill Sharpe, tries to quantify how a fund performs relative to the risk it takes. Take a fund's returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. The bigger the Sharpe ratio, the better a fund performed considering its riskiness. The Sharpe benchmark is a statistically created benchmark that adjusts for a managers' index-like tendencies.

single country fund: A mutual fund that invests in individual countries outside the United States.

standard deviation: Measures the fund against itself -- how is it doing based on its own past performance. A low standard deviation means it's not "deviating" from its normal rate or return. Problem with this measure -- sometimes the deviation could be zero, reflecting consistently bad performance.

total return: Return on investment including price appreciation with reinvested dividends or income over a specific period of time.

transfer agent: Usually a bank. They do all the paperwork for the fund, keeping track of all the fund owners' records.

Treynor Index: A measure of the excess return per unit of risk, where excess return is defined as the difference between the portfolio's return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio's beta. Named after Jack Treynor.

12b-1 fees: These fees are named for the Securities and Exchange Commission regulation that authorized them. If you own shares of a 12b-1 mutual fund, you will be assessed fees, known as 12b-1 fees, to cover some of the fund's promotional and marketing expenses. The fees are usually set on a percentage basis and range from 0.25 percent to 8.5 percent. 12b-1 fees can seriously cut into your yield, especially if the percentage is high. A fund family that charges more than 0.25% in 12b-1 fees cannot advertise itself as no load. The fee is incorporated into the overall expense ratio.

turnover ratio: This ratio shows the amount of times per year that the fund's holdings are turned over. If a fund has $100 million in assets and sells stocks accounting for $40 million, the turnover ratio is 40%. High turnover often, but not always, leads to big tax bills.

value funds: Funds that invest in companies that are presumed to be undervalued by some measure like price-to-earnings, price-to-book or the "instrinsic value" of a company. Prototypical example: Warren Buffett.