In a family of multi-class mutual funds, this is the class that is characterized by a front load structure. Not all fund companies follow this class structure; however, it is the prominent method of distinction.
Typically, the class A fund has a lower management expense ratio compared to the other classes within the same family. This is due to the high initial front load.
The return that an asset achieves over a period of time. This measure simply looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - faces over a period of time. Absolute return differs from relative return because it is concerned with the return of the asset being looked at and does not compare it to any other measure.
Absolute return funds look to make positive returns whether the overall market is up or down, while index tracking funds try to beat the index they are tracking. For example, if there has been a 5% increase in the price of Ford stock over the past year, then the holders of Ford stock have achieved an absolute return of 5% over the past year.
A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Also known as "qualified purchaser".
In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following: 1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income. 2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse. 3) be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered. These investors are considered to be fully functional without all the restrictions of the SEC.
1) A general financial strategy in which an investor attempts to build the value of their portfolio to a desired size.2) In the context of mutual funds, a formal arrangement in which the investor contributes a specified amount of money to the fund on a periodic basis. By doing so, the investor accumulates a larger and larger investment in the fund through their contributions and the growth of the fund itself.
1) A prudent accumulation plan is key to building a financial nest egg for retirement. Many investors accumulate investment funds with regular contributions and the reinvestment of dividends and capital gains. Generally, the goal is to keep funds invested and accumulating for as long as possible.2) An accumulation plan can be useful for investors who wish to build their position in a mutual fund over time, and it also provides the benefits of dollar-cost averaging.
An investing strategy that seeks returns in excess of a specified benchmark.
Investors who believe in active management do not follow the efficient market hypothesis. They believe it is possible to profit from the stock market through any number of strategies to identify mispriced securities. This is the opposite of passive management.
The risk that a fund or managed portfolio creates as it attempts to beat the returns of the benchmark against which it is compared. In theory, to generate a higher return than the benchmark the manager is required to take on more risk. This risk is referred to as active risk.
The more an active portfolio manager diverges from a stated benchmark, the higher the chances become that the returns of the fund could diverge from that benchmark as well. Passive managers who look to replicate an index as closely as possible usually provide the lowest levels of active risk, but this also limits the potential for market-beating returns.
A mutual fund that attempts to achieve the highest capital gains. Investments held in these funds are companies that demonstrate high growth potential, usually accompanied by a lot of share price volatility. These funds are only for non risk-averse investors willing to accept a high risk-return trade-off. Also commonly referred to as a "capital appreciation fund" or "maximum capital gains fund".
Aggressive growth funds have large betas, which means they have a large positive correlation with the stock market. They tend to perform very well in economic upswings and very poorly in economic downturns. An aggressive growth fund may also invest in a company's IPO and then quickly turn around and re-sell the same stock to realize large profits. Some aggressive growth funds also invest in options to boost returns.
A trading system that utilizes very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.
The use of algorithmic trading is most commonly used by large institutional investors due to the large amount of shares they purchase everyday. Complex algorithms allow these investors to obtain the best possible price without significantly affecting the stock's price and increasing purchasing costs.
A mutual fund that tends to perform well during all economic conditions.
In other words a fund that does well regardless of what the stock market does.
A rule created by the National Association of Securities Dealers (NASD) to protect individual investors from conflicts of interest that may arise when brokerage firms and mutual funds collaborate.
The main violation the rule is designed to prevent is an arrangement between a brokerage firm and a mutual fund wherein the brokerage firm directs its clients to the mutual fund company (generating sales) and the mutual fund, in turn, sends its trades through the brokerage firm (generating commissions). Brokerage firms and mutual funds can be fined by the NASD if there is proof that they have violated anti-reciprocal rules.
A ratio used to measure the quality of a fund's investment picking ability. It compares the fund's alpha (or the adjusted return of the fund assuming the market return is zero) to the portfolio's unsystematic risk (or the risk that could be diversified away).
By selecting a basket of investments, the managers of an active investment fund attempt to beat the returns of a relevant benchmark or of the overall market. The appraisal ratio measures the performance of managers by comparing the return of their stock picks to the specific risk of those selections. The higher the ratio, the better the performance of the manager in question.
A list of pre-selected securities that are deemed fit for purchase by a mutual fund or the clients of a brokerage firm.In both cases, the intent is to limit the acount managers' or brokers' array of choices to investments available on the brokerage's approved list. From a brokerage firm's perspective, the approved list will usually be somewhat larger than the selected holdings in any one client's portfolio, so that there are ample choices for constructing a portfolio, or changing it over time as needed. The approved list will also frequently show buy and sell target prices for the securities, and will be updated by the firm's research team and then transmitted to the brokers or account managers.
The "approved list model", where brokers with limited investment knowledge choose stocks from a pre-approved list, is sometimes regarded as not suited to the individual investor, as it tries to group everyone's needs together without taking any one person's wishes or risk profile in account.
The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio.
The ideal asset allocation differs based on the risk tolerance of the investor. For example, a young executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree would be more likely to have 80% in fixed income and 20% equities.
A mutual fund that splits its investment assets among stocks, bonds and other investment vehicles in an attempt to provide a consistent return for the investor. Also referred to as a "diversification fund".
In other words, this is a mutual fund that diversifies your assets among different investment products such as stocks, international stocks, corporate bonds, money market securities and cash. This type of fund offers wide diversification in one fund, as opposed to investing in several funds to obtain this.
In general, the market value of assets an investment company manages on behalf of investors.
There are widely differing views on what the term means. Some financial institutions include bank deposits, mutual funds and institutional money in their calculations. Others limit it to funds under discretionary management where the client delegates responsibility to the company.
An investment program that allows you to contribute small amounts of money (as little as $20 a month) in regular intervals. Funds are automatically deducted from your checking/savings account or your paycheck, and invested in a retirement account or mutual fund.
This is one of the best ways to save money. By "paying yourself first" many people find they invest more in the long run. Their investments are treated as another part of their regular budget. It also helps to force you to pay for investments automatically, so don't forget and spend all your money on impulse.
An investment program in which capital gains or other income received from investments are automatically used for reinvestment purposes. In the case of a mutual fund, for example, capital gains produced by the fund would be used to automatically purchase more shares of the fund, instead of being distributed to the investor as cash.
By utilizing an automatic reinvestment plan, an investor is able to easily make use of their investment gains to produce further gains, taking advantage of compounding. Over a period of years, the added value produced by automatic reinvestment can turn out to be worth a substantial sum.
A figure used when reporting the historical return of a mutual fund. The AAR is stated after expenses have been tallied, including administration fees, 12b-1 fees, and others.
When you are selecting a mutual fund be careful not to depend too much on the AAR as it can be artificially inflated. For example, a fund can be down 25% in the first year, and up 25% in year two, giving an AAR of 0%. But if you had invested $1,000 in the fund, you'd have $750 after year one and $937 (750*1.25) after year two, hardly a 0% return.
1. Sometimes used in determining a bond's yield to maturity. A bond's average price is calculated by adding its face value to the price paid for it and dividing the sum by two.
2. Average price is also sometimes known as Net Asset Value (NAV) for mutual funds.
1. Although the average price of a bond is not the most accurate method to find its YTM, it does give investors a rough and simple gauge to find out what a bond is worth.
A class in a family of multi-class mutual funds. This class is characterized by a rear-end load structure that is paid only when selling the fund.
Class B funds will generally have higher management expense ratios compared to front load funds within the same family. Fund companies attempt to increase their profits while the rear load is effective, as it will normally decrease in value with time until no load is charged whatsoever. Not all fund companies follow this class structure, but it is the prominent method of distinction.
A fee that an investor pays when selling a mutual fund within a certain number of years - usually seven. The fee is a shown as a percentage and usually decreases yearly until the seventh year when it drops to zero. Different funds will usually have different options available to investors pertaining to how they want the back-end load to be applied.
Sometimes in exchange for paying no fees up front, the investor pays an annual fee for marketing and managing that is higher than the fees charged for a front-load fund. Back-end mutual funds are okay if you plan on investing for the long-term; otherwise, you'll pay high commission to withdraw early. Remember that almost all mutual funds charge an annual administration fee that is automatically withdrawn from your account, so back-end funds aren't completely free. In the U.K., a Back-End Load is called an "Exit Charge." While in Canada, a Back-End Load is sometimes called a "Deferred Sales Charge".
A mutual fund that invests its assets into the money market, bonds, preferred stock, and common stock with the intention to provide both growth and income. Also known as an "asset allocation fund".
A balanced fund is geared towards investors looking for a mixture of safety, income, and capital appreciation. The amount the mutual fund invests into each asset class usually must remain within a set minimum and maximum.
A standard against which the performance of a security, index or investor can be measured.
Most equity mutual funds and portfolio managers use the S&P 500 index as the benchmark to beat.When evaluating performance of any investment, it's important to compare against the right benchmark. For example, comparing a bond fund to the Russell 2000 (which is an index of small caps) is not meaningful.
A mutual fund composed of various asset classes (such as stocks, bonds and money market securities), allowing investors to diversify their holdings by owning just a single fund. Also called "hybrid funds".
The risk of blend funds is somewhere between that of growth funds and value funds. Thus, by applying both of these fund strategies, a blend fund might, for instance, invest in both high-growth Internet stocks (like growth funds) and cheaply priced automotive companies (like value funds). As such, blend funds are difficult to classify in terms of risks, and their performance can vary considerably. However, blend funds are usually less risky than stock mutual funds and somewhat more risky than bond funds or money market mutual funds.
A buzzword referring to a benchmark used to evaluate the performance of a fund. The benchmark is an index that reflects the investment scope of the funds investment. Comparing a funds performance to a benchmark index gives an idea as to how well the fund is doing compared to the market. Also known referred to as "Bogy"
For example, the performance of small-cap fund may be compared to the Russell 2000, which is a benchmark for small-cap funds. The Russell 2000 would be referred to as the small-caps bogy, when talking of its over or underperformance to the fund. One of the most common benchmarks is the S&P 500 index.
A fund invested primarily in bonds and other debt instruments. The exact type of debt the fund invests in will depend on the focus of the fund but may include an investment in government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities.
A short-term bond fund, for example, will invest mostly in debt instruments with short-term maturities, such as Treasury bills, while an international bond fund will invest in bonds issued in foreign countries.In general, these type of funds, along with bonds themselves, are considered to be lower risk because they produce a predictable cash flow. However, bond funds are not risk free, although this is a common misconception. The biggest risks in any bond fund include credit risk, reinvestment risk and interest rate risk, which could all lead to the fund losing money or underperforming the market.
A predetermined contribution amount in a mutual fund making the investor eligible for a reduction in sales charges. Mutual Funds are required to give a description of these breakpoints and the eligibility requirements in their fund prospectus. It is prudent for investors to be aware of these.
An example of breakpoints on a front-load mutual fund would be a charge of 6.25% on investments of less than $25,000, a charge of 5.5% on sales of $25,000 to $99,999 and 4.75% on investments above $100,000. By reaching or surpassing a breakpoint, an investor will face a lower sales charge and save money.
The sale of a mutual fund at a set dollar amount that allows for the fundholder to move into a lower sales charge bracket. If an investor is unable at the time of investment to come up with the funds necessary to qualify for the lower fee they can sign a letter of intent stating they will reach the total amount, or breakpoint, in a set time period.Any sales that occur just below a breakpoint are considered unethical and in violation of NASD rules.
An example of a breakpoint sale would be where an investor plans to invest $95,000 in a front-load mutual fund and they face a charge of 6.25% or $6,125. If they are properly advised they will be told that if they add $5,000 for a total investment of $100,000, they'll qualify for a lower sales charge of 5.5%, or $5,500. This means they will essentially have $5,625 more invested than the initial purchase plan due to the savings in sales charges.
In a family of multi-class mutual funds, the class that has a constant load structure throughout the life of the fund.
The class C fund usually has a higher management expense ratio because of its lower load fee when compared to other mutual funds with different load structures in the same family. Not all fund companies follow this class structure. However, it is the prominent method of distinction.
A ratio used to determine return relative to drawdown (downside) risk in a hedge fund. Calculated as:
Generally speaking, the higher the Calmar ratio, the better. Some funds have high annual returns, but they also have extremely high drawdown risk. This ratio helps determine return on a downside risk adjusted basis. Most people use data from the past 3 years.
An entry-level program offered by the Canadian Securities Institute (CSI) that allows an individual to become a qualified mutual fund representative.
The CSCTM is often the first step for Canadian individuals wishing to pursue a career that involves trading securities and providing investment advice to clients. The CSCTM comprises two exams, referred to as "volume 1" and "volume 2", and for each, the student must answer 100 multiple-choice questions within two hours.
A mutual fund that attempts to increase asset value primarily through investments in growth stocks. The heavy investment in growth stocks increases the risk associated with these types of funds. Also called "aggressive growth fund".
As its name suggests, a capital appreciation fund seeks to deliver value to shareholders by investing in companies with appreciating share prices.This type of fund is the exact opposite of an income or dividend fund, which focuses on investing in companies that pay shareholders a dividend. In addition to risk tolerance, something else to consider when analyzing these different types of funds is the fact that capital gains are usually taxed lower than interest income.
Distributions that are paid to an investment company's shareholders out of the capital gains of the company's investment portfolio.
Capital gains distributions typically occur near the end of the calendar year and are taxable to the shareholder of the investment company. This poses a problem for some mutual fund investors who purchase new mutual funds near the end of a calendar year. Because they receive a capital gains distribution, they immediately receive taxable income and face a mutual fund NAV that is reduced from the distribution.
An assessment of the extent to which a stock fund or other similar investment fund's assets have appreciated or depreciated, which may have tax implications for investors. Positive exposure would mean that the assets in the fund have appreciated and that shareholders will have to pay taxes on any realized gains on the appreciated assets. Negative exposure denotes that the fund has a loss carryforward that can cushion some of the capital gains.Calculated as:
For example, a stock fund with a million shares currently has assets that are worth a total of $100 million. Six months ago, the assets were only worth $50 million and the fund still has $10 million worth of losses that can be carried forward. In this case, the capital gains exposure is 40% or, in other words, if the fund manager realizes the gains, each investor will have to pay taxes on a $40 capital gain.
An investment vehicle, offered by certain institutions, that guarantees the investor's initial capital investment from any losses.
Even though these products prevent you from losing your invested capital, they also limit the amount of return you can gain should the investments appreciate. This is how the offering institutions can afford to guarantee the principal investment.
A fund that provides investment services solely to the one firm holding ownership.
A captive fund is funded entirely by one institution or the clients of an institution holding ownership. Institutions that hold captive funds include investment banks, insurance companies, and institutional asset managers.
A certification indicating an individual's expertise in mutual funds and the mutual fund industry. These individuals advise clients on which mutual funds best suit their particular needs. The CFS designation does not license individuals to buy or sell mutual funds; however, in many cases Certified Fund Specialists do have this license, which enables them to buy and sell the funds for their clients.
The CFS is the oldest designation in the mutual fund industry. Training is provided by the Institute of Business & Finance (IBF) in the form of a 60-hour self-study program. Course topics include, but are not limited to, portfolio theory, dollar-cost averaging and annuities. The course includes a final exam, administered by the National Association of Securities Dealers and an open-book case study.
In the most general form, a class is a group of securities with similar features.
With stocks, common and preferred shares are two different classes of stock.
A mutual fund that replicates the performance or strategy of an existing mutual fund or index through the use of derivatives.
Clone funds were very common in Canada, where, until a legislative change in mid-2005, investors were limited in the amount of foreign investment they could have in their Registered Retirement Savings Plan (RRSP). For example, suppose a Canadian investor wanted to buy an S&P 500 index fund (a foreign investment) for his RRSP but had no more room for foreign content. To get around the foreign-content restrictions, s/he would have bought an S&P 500 clone fund, which replicated the performance of the S&P 500 but was classified as a Canadian security because it was composed of derivatives trading in Canada.
When an investment company issues a fixed number of shares in an actively managed portfolio of securities. The shares are traded in the market just like common stock.
Most mutual funds are open-end funds, not closed-end. The main difference with closed-end funds is that market price of the shares is determined by supply and demand and not by net-asset value (NAV). Also known as a "closed-end mutual fund" or "closed-end fund".
An investment-management company that sells a limited number of shares to investors on an exchange by way of an initial public offering. For investors to sell the shares they purchased from the closed-end management company, there must be buyers willing to buy the shares at a price determined by the market. The most common type of closed-end management company is a closed-end mutual fund.
Closed-end management companies are not required to repurchase the shares that they have sold to investors. Investors in these types of funds sell their own shares at the market price of the security, even if that price is significantly below the net asset value of the portfolio that their shares represent. It is common for the price of closed-end funds to be above or below the actual NAV.
An investment vehicle that combines tax exempt assets of various individuals and organizations in order to create a well diversified portfolio.
Collective funds are investment trusts that have approval from the IRS to combine pensions and profit sharing funds.
A type of mutual fund consisting of assets from several accounts that are blended together. Sometimes called a "pooled fund."
They are "commingled" to reduce the costs of managing them separately.
1. In securities, it is the mixing of customer-owned securities with brokerage-owned securities. 2. In trust banking, it is the pooling of individual customer accounts into a fund, a share of which is owned by each contributing customer. This is similar to a mutual fund.3. In real estate, it is the illegal act of a broker combining clients' funds with personal funds because, by law, a broker is required to use a separate trust or escrow fund to temporarily hold a client's funds.
In all contexts, commingling is basically mixing funds so that they are considered the same material fund. For example, if you deposit a paycheck into an inheritance fund, the paycheck would not be considered separate funds but part of the inheritance fund. Thus, the paycheck is no longer considered separate property from the inheritance.
A fund that collects investor contributions for use in future and commodity option trading.
Commodity pools limit investors' risk to the amount they have contributed into the fund. Commodity pools are similar to mutual funds.
A theory stating that an investment firm passing all capital gains, interest, and dividends onto their customers/shareholders shouldn't be levied at the corporate level like most regular companies are.
Basically the firm passes income (without taxing themselves) directly to the investors who are then taxed as individuals. This theory means investors are taxed once on the same income, whereas in regular companies investors are taxed twice. Both when the company reports income and when dividends are received. An example is a REIT or mutual fund company.
A method of allocating investments with the goal of growing invested capital over the long term. This investment strategy focuses on minimizing risk by making long-term investments in companies that show consistent growth over time. Conservative growth portfolios feature low asset turnover, or a high percentage of fixed assets on their balance sheets, and should employ a buy-and-hold investment philosophy.
Although investment funds, portfolio managers and investment advisors may claim to employ a conservative growth strategy, the actual assets held in some of these funds vary considerably. When investing in conservative growth funds, it is a good idea to perform regular checks on your portfolio's holdings to make sure they match the investment strategy the portfolio claims to use.
In the context of mutual funds, it is a back-end load charged only when a special circumstance occurs.
A good example of a CDSC is a charge applied when you decide to move your money from one mutual fund into another company's fund. This sales charge is "contingent" because it's only applied when the funds are prematurely moved out of the original mutual fund.
A fixed-income style that permits managers to add instruments with greater risk and greater potential return, such as high yield, global, and emerging market debt, to their core portfolios of investment-grade bonds.
The percentage of a portfolio in other sectors is variable, but is usually less than 25%. As you can imagine, with this broad definition there are a number of different strategies that can be considered core-plus.
A set of shares or securities that makes up one unit of the fund held by the trust that underlies an exchange-traded fund (ETF). One creation unit is the denomination of underlying assets that can be redeemed for a certain number of ETF shares.
Creation units can vary in size, with most containing between 25,000 and 600,000 ETF shares each. The utilization of creation units in the construction of ETF shares is critical because they allow for the representation of the underlying assets - the ETF shares, which represent a tiny chunk of a creation share - to be traded intraday. The ETFs ability to be traded on an exchange give them a significant advantage over comparable investment vehicles such as mutual funds.
An investment fund that invests in both public and private equity.
These funds are typically high yield/high growth funds.
The investment objective for a portfolio of securities to achieve a steady income.
Current income portfolios are often created for individuals in their retirement years because they need a steady income for living expenses. A current income portfolio is moderately conservative, containing a large percentage of fixed-income securities. However, it also includes other assets such as blue-chip stocks with high dividends and annuities.
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