Mutual Fund Key Terms

12B-1 fees
The percent of a mutual fund’s assets used to defray marketing and distribution expenses. The amount of the fee is stated in the fund’s prospectus. The Securities and Exchange Commission has proposed that 12B-1 fees in excess of 0.25% be classed as a load. A true no-load fund has neither a sales charge nor 12B-1 fee. 

Closed-end and open-ended funds
Most mutual funds are open ended, i.e., their managers stand ready to sell new shares to the public and to redeem outstanding shares on demand at a price equal to an appropriate share of the value of the fund’s portfolio, which is computed daily at the close of the market. A closed-end fund is a publicly traded fund sold on stock exchanges or over the counter that sells shares like any other corporation and usually does not redeem its shares, which may trade above or below its net asset value.

Payments to investors from a fund’s cash flow. May include dividends from earnings, capital gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least once per year.

Expense ratio
The percentage of the assets that were spent to run a mutual fund (as of the last annual statement). This includes expenses such as management and advisory fees, overhead costs and 12B-1 (distribution and advertising) fees. The expense ratio does not include brokerage costs for trading the portfolio, although these are reported as a percentage of assets to the Securities and Exchange Commission by the funds in a Statement of Additional Information (SAI). The SAI is available to shareholders on request. Neither the expense ratio nor the SAI includes the transaction costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio.

Index fund
Mutual fund whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index. By eliminating the costs of researching stocks and keeping trading costs such as brokerage commissions low, index funds have low expenses. Since most index funds buy and hold the securities that make up the index, these funds also typically don’t generate as many taxable capital gains as actively managed funds.

Load Fund
A mutual fund with shares sold at a price including a large sales charge, or load–typically 4% to 8% of the net amount indicated. Some no-load funds have distribution fees permitted by article 12B-1 of the Investment Company Act; these are typically 0.25%.

Net Asset Value (NAV)
The value of a fund’s investments. The NAV per share usually represents the mutual fund’s market price, subject to a possible sales or redemption charge. For a closed-end fund, the market price may vary significantly from the net asset value.

Redemption charge
The commission charged by a mutual fund when redeeming shares. For example, a 2% redemption charge (also called a back-end load, or a contingent deferred sales charge) on the sale of shares valued at $1,000 will result in payment of $980 (or 98% of the value) to the investor. This charge may decrease or be eliminated as shares are held for longer time periods.

Total return
The most comprehensive measure of a fund’s performance, encompassing distributions of capital gains and dividends or interest, plus unrealized capital gains or losses, over a period of time. Total return may be shown as year-to-date or on a compound annualized basis over several years. Total return is the best gauge for investors of how a fund has done both recently and over the long haul.

For mutual funds, a measure of trading activity during the previous year, expressed as a percentage of the average total assets of the fund. A turnover ratio of 25% means that the value of trades represented one-fourth of the assets of the fund. Portfolios with high turnover rates incur higher transaction costs and are more likely to distribute capital gains which are taxable to non-retirement accounts.

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