Glossary of Terms
Adviser: An organization employed by a mutual fund to give professional advice on the fund's investment and asset management practices. Also called investment adviser.
Asset Allocation: The process of dividing your money between different types of assets, such as stocks, bonds and cash, to generate the overall return you need in a manner that is consistent with your risk tolerance.
Asset Classes: Different types of investments. Stocks, bonds and money market investments are broad asset classes, which can be further divided into smaller groups, such as large-cap and small-cap stocks, government and municipal bonds, etc.
Automatic Investment Plan (AIP): A method for investing in mutual funds which enables a shareholder to select a specific amount to be withdrawn from a bank checking or savings account, or an automatic exchange from another mutual fund, on a regularly scheduled basis and invested in additional fund shares.
Automatic Reinvestment: A shareholder-authorized purchase of additional fund shares using dividend distributions or capital gains distributions.
Bond: An IOU issued by a corporation, municipality or government agency. A bond issuer is borrowing money from you and other members of the public and, in exchange, promises to pay interest at regular intervals until the bond matures, at which time investors receive their principal back.
Capital Appreciation: The growth of your principal. If you invest $100 in a stock mutual fund and its value increases to $120, the $20 increase is called capital appreciation. Capital appreciation or growth is a specific long-term objective of many mutual funds.
Compounding: A process by which investment earnings build up not only on the money originally invested but also on the earnings and gains made in previous years.
Cost Basis: The original cost of an investment, used to determine capital gains and losses for tax purposes.
Coupon Rate: The interest rate percentage that an issuer of debt securities promises to pay over the life of the security.
Credit Rating: An assessment of a particular issuer's creditworthiness which results in a rating being assigned. Ratings range from AAA (very high) to D (in default). Several companies study issuers and make ratings decisions, including Moody's and Standard & Poor's.
Diversification: The strategy of investing broadly across a number of different investments to reduce risk; a hallmark of mutual fund investing.
Dollar Cost Averaging: The strategy of investing a fixed amount of money at regular intervals regardless of financial market movements. The goal is to reduce the average cost per share, since you buy more shares when the price is low and fewer shares when the price is high.
Exchange Privilege: The option of enabling mutual fund shareholders to transfer their investment from one fund to another within the same fund family.
Fixed-Income Securities: Another term for bonds, which pay a fixed rate of interest until they mature. Bond mutual funds are called fixed-income funds, but the name is misleading because in a bond mutual fund your income and principal value both fluctuate.
Growth Stock: A stock in a company characterized by above-average growth in earnings or sales. Growth stocks tend to have a high price relative to earnings and provide little, if any, dividend.
Index: A statistical model that serves as a reference or benchmark for judging how well an investment is performing. The benchmark most often used for stock market performance, for example, is the Standard & Poor's 500® Index, which measures the average performance of 500 widely held large-company stocks.
Investment Grade: Investment-grade obligations are those rated at the time of purchase AAA, AA, A or BBB by S&P, Aaa, Aa, A or Baa by Moody's or which are similarly rated by another nationally recognized statistical rating organization or are unrated but deemed by the Adviser to be comparable in quality to instruments that are so rated.
Liquidity: The measure of how quickly an investment can be turned into cash. A mutual fund generally is considered a very liquid investment, because shares can be redeemed at any time. In contrast, a house is a very illiquid investment.
Maturity: The date on which an issuer returns investors' principal, thus satisfying its final obligation to those investors.
Mutual Funds: An investment company that pools the money of many individual investors and uses it to buy a diversified portfolio of securities.
Net Asset Value (NAV): The value of a single share in a mutual fund, which is determined by dividing the total assets of the fund, minus its liabilities, by the total number of shares outstanding.
Prospectus: A legal document providing important information about a mutual fund. Filed with the Securities and Exchange Commission and available to all investors, the prospectus includes information on the fund's objectives and policies, risks, costs, past performance, fund fees, and other pertinent information to prospective investors.
Redeem: To cash in shares by selling them back to a mutual fund company. Mutual fund shares may be redeemed on any business day.
Reinvestment Privilege: An option which allows shareholders to have their mutual fund dividends automatically used to buy additional fund shares.
Risk Tolerance: An investor's personal ability or willingness to withstand declines or losses in an investment caused by one or more of the different types of investment risk. That ability can be limited by an investor's temperament as well as his/her time frame. For example, someone who is investing for a goal 10 to 20 years or more in the future generally has a higher risk tolerance and may feel more comfortable with riskier investments than the person whose investment goal is only five years or less away.
Systematic Withdrawal Plan (SWP): A program which permits shareholders to have a specified amount automatically redeemed either monthly, quarterly, semi-annually or annually, and paid per the shareholder's instructions.
Volatility: The sharp price movement of a security or market within a specified time period.