Definition of Mutual fund
Mutual fund
mutual funds are pools of money that are managed by an investment company. 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.
Related: open-end fund, closed-end fund.
mutual fund
When you buy a mutual fund, you are pooling your money with that of other investors. An investment professional called a portfolio advisor takes that money and invests it for all the investors in a variety of different securities as determined by the investment objectives of the mutual fund. This gives you the benefit of diversification that is, being invested in many different investments at once.
Related Terms:
This is a fund that buys common stock, preferred stock and bonds. The same as a
balanced fund.
The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.
The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund
A result associated with the CAPM, asserting that investors will choose to invest their
entire risky portfolio in a market-index or mutual fund.
An open-end investment company, shares of which are sold without a sales charge.
There can be other distribution charges, however, such as Article 12B-1 fees. A true "no load" fund will have
neither a sales charge nor a distribution fee.
The fund's investment strategy category as stated in the prospectus. There are
more than 20 standardized categories.
A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A
positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market
return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%.
An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the
change in the market alone. In a Jensen Index, it is factor to represent the portfolio's performance that
diverges from its beta, representing a measure of the manager's performance.
The average time to maturity of securities held by a mutual fund. Changes in interest rates
have greater impact on funds with longer average life.
Brokerage house clerical operations that support, but do not include, the trading of stocks and
other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory
compliance.
Back-end loan fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from
4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a
designated time, such as one year. The commission decreases the longer the investor holds the shares. The
formal name for the back-end load is the contingent deferred sales charge, or CDSC.
An investment company that invests in stocks and bonds. The same as a balanced mutual fund.
Performance over time, rated on a scale of 1-10.1 indicates that a mutual fund's return was in the
top 10% of funds being compared, while 3 means the return was in the top 30%. Objective Rank compares all
funds in the same investment strategy category. All Rank compares all funds.
A mutual fund's return minus the change in the Standard & Poors 500 Index for the
same time period. A notation of -5.00 means the fund return was 5 percentage points less than the gain in the
S&P, while 0.00 means that the fund and the S&P had the same return.
Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.
The process of completing an order to buy or sell securities. Once a trade is executed, it is reported
by a Confirmation Report; settlement (payment and transfer of ownership) occurs in the U.S. between 1
(mutual funds) and 5 (stocks) days after an order is executed. Settlement times for exchange listed stocks are
in the process of being reduced to three days in the U. S.
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 SEC by the funds in a Statement of
Additional Information (SAI). the SAI is available to shareholders on request. Neither the expense ratio or 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 (OER).
Global fund
A mutual fund that can invest anywhere in the world, including the U.S.
Income fund
A mutual fund providing for liberal current income from investments.
Institutional investors
Organizations that invest, including insurance companies, depository institutions,
pension funds, investment companies, mutual funds, and endowment funds.
International fund
A mutual fund that can invest only outside the United States.
Load fund
A mutual fund with shares sold at a price including a large sales charge -- 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%. A "true no-load" fund has neither a sales charge nor
Freddie Mac program, the aggregation that the fund purchaser receives some investment advice or other
service worthy of the charge.
Minimum purchases
For mutual funds, the amount required to open a new account (Minimum Initial
Purchase) or to deposit into an existing account (Minimum Additional Purchase). These minimums may be
lowered for buyers participating in an automatic purchase plan
Money market fund
A mutual fund that invests only in short term securities, such as bankers' acceptances,
commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at
$1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities
and/or the fund may have private insurance protection.
Net asset value (NAV)
The value of a fund's investments. For a mutual fund, the net asset value per share
usually represents the 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.
No-load fund
A mutual fund that does not impose a sales commission. Related: load fund
Open-end fund
Also called a mutual fund, an investment company that stands ready to sell new shares to the
public and to redeem its outstanding shares on demand at a price equal to an appropriate share of the value of
its portfolio, which is computed daily at the close of the market.
Phone switching
In mutual funds, the ability to transfer shares between funds in the same family by
telephone request. There may be a charge associated with these transfers. Phone switching is also possible
among different fund families if the funds are held in street name by a participating broker/dealer.
Prospectus
Formal written document to sell securities that describes the plan for a proposed business
enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision.
Prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information.
Record date
1) Date by which a shareholder must officially own shares in order to be entitled to a dividend.
For example, a firm might declare a dividend on Nov 1, payable Dec 1 to holders of record Nov 15. Once a
trade is executed an investor becomes the "owner of record" on settlement, which currently takes 5 business
days for securities, and one business day for mutual funds. Stocks trade ex-dividend the fourth day before the
record date, since the seller will still be the owner of record and is thus entitled to the dividend.
2) The date that determines who is entitled to payment of principal and interest due to be paid on a security. The record
date for most MBSs is the last day of the month, however the last day on which they may be presented for the
transfer is the last business day of the month. The record date for CMOs and asset-backed securities vary with each issue.
Redemption charge
The commission charged by a mutual fund when redeeming shares. For example, a 2%
redemption charge (also called a "back end load") on the sale of shares valued at $1000 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.
Regional fund
A mutual fund that invests in a specific geographical area overseas, such as Asia or Europe.
Sales charge
The fee charged by a mutual fund when purchasing shares, usually payable as a commission to
marketing agent, such as a financial advisor, who is thus compensated for his assistance to a purchaser. It
represents the difference, if any, between the share purchase price and the share net asset value.
Settlement date
The date on which payment is made to settle a trade. For stocks traded on US exchanges,
settlement is currently 3 business days after the trade. For mutual funds, settlement usually occurs in the
U.S.the day following the trade. In some regional markets, foreign shares may require months to settle.
Single country fund
A mutual fund that invests in individual countries outside the United States.
Stock ticker
This is a lettered symbol assigned to securities and mutual funds that trade on U.S.financial exchanges.
Turnover
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 onefourth
of the assets of the fund. Finance: The number of times a given asset, such as inventory, is replaced
during the accounting period, usually a year. Corporate: The ratio of annual sales to net worth, representing
the extent to which a company can growth without outside capital. Markets: The volume of shares traded as a
percent of total shares listed during a specified period, usually a day or a year. Great Britain: total revenue.
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 SEC has recently 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.
12b-1 funds
mutual funds that do not charge an upfront or back-end commission, but instead take out up to
1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an
arrangement allowed by the SEC's Rule 12b-I (passed in 1980).
Withdrawal plan
The ability to establish automatic periodic mutual fund redemptions and have proceeds
mailed directly to the investor.
capital stock
Ownership shares issued by a business corporation. A business
corporation may issue more than one class of capital stock shares.
One class may give voting privileges in the election of the directors of the
corporation while the other class does not. One class (called preferred
stock) may entitle a certain amount of dividends per share before cash
dividends can be paid on the other class (usually called common stock).
Stock shares may have a minimum value at which they have to be issued
(called the par value), or stock shares can be issued for any amount
(called no-par stock). Stock shares may be traded on public markets such
as the New York Stock Exchange or over the Nasdaq network. There are
about 10,000 stocks traded on public markets (although estimates vary
on this number). In this regard, I find it very interesting that there are
more than 8,000 mutual funds that invest in stocks.
mark to market
Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.
Accrued Income
Income that has been earned but not yet received. For instance, if you have a non-registered Guaranteed Investment Certificate (GIC), mutual fund or Segregated Equity fund, growth accrues annually or semi-annually and is taxable annually even though the gain is only paid at maturity of your investment.
Canadian Deposit Insurance Corporation
Better known as CDIC, this is an organization which insures qualifying deposits and GICs at savings institutions, mainly banks and trust companys, which belong to the CDIC for amounts up to $60,000 and for terms of up to five years. Many types of deposits are not insured, such as mortgage-backed deposits, annuities of duration of more than five years, and mutual funds.
Dollar Cost Averaging
A way of smoothing out your investment deposits by investing regularly. Instead of making one large deposit a year into your RRSP, you make smaller regular monthly deposits. If you are buying units in a mutual fund or segregated equity fund, you would end up buying more units in the month that values were low and less units in the month that values were higher. By spreading out your purchases, you don't have to worry about buying at the right time.
Insured Retirement Plan
This is a recently coined phrase describing the concept of using Universal Life Insurance to tax shelter earnings which can be used to generate tax-free income in retirement. The concept has been described by some as "the most effective tax-neutralization strategy that exists in Canada today."
In addition to life insurance, a Universal Life Policy includes a tax-sheltered cash value fund that cannot exceed the policy's face value. Deposits made into the policy are partially used to fund the life insurance and partially grow tax sheltered inside the policy. It should be pointed out that in order for this to work, you must make deposits into this kind of policy well in excess of the cost of the underlying insurance. Investment of the cash value inside the policy are commonly mutual fund type investments. Upon retirement, the policy owner can draw on the accumulated capital in his/her policy by using the policy as collateral for a series of demand loans at the bank. The loans are structured so the sum of money borrowed plus interest never exceeds 75% of the accumulated investment account. The loans are only repaid with the tax free death benefit at the death of the policy holder. Any remaining funds are paid out tax free to named beneficiaries.
Recognizing the value to policy holders of this use of Universal Life Insurance, insurance companies are reworking features of their products to allow the policy holder to ask to have the relationship of insurance to investment growth tracked so that investment growth inside the policy may be maximized. The only potential downside of this strategy is the possibility of the government changing the tax rules to prohibit using a life insurance product in this manner.
Segregated Fund
Sometimes called seg funds, segregated funds are the life insurance industry equivalent to a mutual fund with some differences.The term "mutual fund" is often used generically, to cover a wide variety of funds where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds, mortgages, etc.
Since Segregated funds are actually deferred annuity contracts issued by life insurance companies, they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. mutual funds don't have this protection.
Unlike mutual funds, segregated funds offer guarantees at maturity (usually 10 years from date of issue) or death on the limit of potential losses - at times up to 100% of original deposits are guaranteed which makes them an attractive alternative for the cautious and/or long term investor. On the other hand, with regular mutual funds, it is possible to have little or nothing left at death or plan maturity.
growth funds
mutual funds that seek long-term capital growth. This type of fund invests primarily in equity securities.
income funds
mutual funds that seek regular income. This type of fund invests primarily in government, corporate and other types of bonds, debt securities, and other income producing securities and in certain circumstances can also hold common and preferred shares.
index funds
mutual funds that aim to track the performance of a specific stock or bond index. This process is also referred to as indexing and passive management.
international fund
A mutual fund that can invest in securities issued anywhere outside of Canada.
loads
Loads are sales fees (or commissions) that are charged when you buy a mutual fund.
money market fund
A type of mutual fund that invests primarily in short-term debt securities maturing in one year or less. These include treasury bills, bankers’ acceptances, commercial paper, discount notes and guaranteed investment certficates.
net asset value
The value of all the holdings of a mutual fund, less the fund's liabilities.
prospectus
A legal document that must be filed with securities regulators in order to distribute securities, including mutual funds. mutual fund dealers are required by law to distribute this document to investors before the purchase of any units. It contains all key information, such as investment objectives and strategies, risk factors and financial highlights.
qualified investments (Canada)
Qualified investments is the term used for investments that can be held in an RSP. These investments generally include:
Canadian dollar savings accounts, guaranteed investment certificates, term deposits
shares of Canadian and foreign companies listed on a prescribed stock exchange
shares of some over-the-counter U.S. and Canadian companies
shares of some small businesses
certain types of bonds and money-market investments such as treasury bills, Canada Savings Bonds, Government of Canada bonds, provincial government bonds, Crown Corporation bonds, bonds issued by Canadian corporations listed on a prescribed stock exchange, and certain strip bonds
certain types of mortgages, including your own
certain covered call options, warrants and rights
certain mutual funds
Regular Investment Plan (RIP)
A plan under which you may make regular deposits of the same amount to your mutual funds account once a month, once every 2 weeks, or once a week. You can also make regular deposits up to four times a month on any dates you choose.
savings funds
mutual funds that seek to preserve capital. This type of fund invests primarily in short-term securities with an average term to maturity of one year or less, or in the case of money market funds, 90 days or less.
systematic withdrawal plan
Plans offered by mutual fund companies that allow unitholders to receive payment from their investment at regular intervals.
Annual fund operating expenses
For investment companies, the management fee and "other expenses,"
including the expenses for maintaining shareholder records, providing shareholders with financial statements,
and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.
Closed-end fund
An investment company that sells shares like any other corporation and usually does not
redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or
below its net asset value. Related: Open-end fund.
Cost of funds
Interest rate associated with borrowing money.
Employee stock fund
A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.
Endowment funds
Investment funds established for the support of institutions such as colleges, private
schools, museums, hospitals, and foundations. The investment income may be used for the operation of the
institution and for capital expenditures.
Federal funds
Non-interest bearing deposits held in reserve for depository institutions at their district Federal
Reserve Bank. Also, excess reserves lent by banks to each other.
Federal funds market
The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.
Federal funds rate
This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction
of U.S. interest rates.
Forward Fed funds
Fed funds traded for future delivery.
Fund family
Set of funds with different investment objectives offered by one management company. In many
cases, investors may move their assets from one fund to another within the family at little or no cost.
Fundamental analysis
Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.
Fundamental beta
The product of a statistical model to predict the fundamental risk of a security using not
only price data but other market-related and financial data.
Fundamental descriptors
In the model for calculating fundamental beta, ratios in risk indexes other than
market variability, which rely on financial data other than price data.
Funded debt
Debt maturing after more than one year.
Funding ratio
The ratio of a pension plan's assets to its liabilities.
Funding risk
Related: interest rate risk
Funds From Operations (FFO)
Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.
Hedge fund
A fund that may employ a variety of techniques to enhance returns, such as both buying and
shorting stocks based on a valuation model.
High-coupon bond refunding
Refunding of a high-coupon bond with a new, lower coupon bond.
Index fund
Investment fund designed to match the returns on a stockmarket index.
International Monetary Fund
An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.
Liability funding strategies
Investment strategies that select assets so that cash flows will equal or exceed
the client's obligations.
Low-coupon bond refunding
Refunding of a low coupon bond with a new, higher coupon bond.
Match fund
A bank is said to match fund a loan or other asset when it does so by buying (taking) a deposit of
the same maturity. The term is commonly used in the Euromarket.
Mutual offset
A system, such as the arrangement between the CME and SIMEX, which allows trading
positions established on one exchange to be offset or transferred on another exchange.
Mutually exclusive investment decisions
Investment decisions in which the acceptance of a project
precludes the acceptance of one or more alternative projects.
Net advantage of refunding
The net present value of the savings from a refunding.
Nonrefundable
Not permitted, under the terms of indenture, to be refundable.
Overfunded pension plan
A pension plan that has a positive surplus (i.e., assets exceed liabilities).
Prerefunded bond
Refunded bond.
Private Export Funding Corporation (PEFCO)
Company that mobilizes private capital for financing the
export of big-ticket items by U.S. firms by purchasing at fixed interest rates the medium- to long-term debt
obligations of importers of U.S. products.
Purchase fund
Resembles a sinking fund except that money is used only to purchase bonds if they are selling
below their par value.
Pure index fund
A portfolio that is managed so as to perfectly replicate the performance of the market portfolio.
Refundable
Eligible for refunding under the terms of indenture.
Refunded bond
Also called a prerefunded bond, one that originally may have been issued as a general
obligation or revenue bond but that is now secured by an "escrow fund" consisting entirely of direct U.S.
government obligations that are sufficient for paying the bondholders.
Refunding
The redemption of a bond with proceeds received from issuing lower-cost debt obligations
ranking equal to or superior to the debt to be redeemed.
Revenue fund
A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.
Sinking fund requirement
A condition included in some corporate bond indentures that requires the issuer to
retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity.
Stopping curve refunding rate
A refunding rate that falls on the stopping curve.
Surplus funds
Cash flow available after payment of taxes in the project.
Term Fed Funds
Fed funds sold for a period of time longer than overnight.
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