A-B
The minimum amount a Fool must initially invest in a fund, typically between $1,000 and $10,000.
Account minimum
When the fund sells a stock, it incurs short-term and long-term capital gains or losses. Unlike a corporation, a mutual fund does not itself pay income taxes. By law, each year the fund must distribute that year's net investment income (the total of dividends and interest received less fund expenses) and net realized gain (gains less losses on securities sales) to the fund's shareholders. That means that you get to foot the taxes due on those gainsFor various reasons, actively managed mutual funds don't invest all the money at their disposal, but instead maintain cash balances of approximately 8%.
Capital gains
Larger companies worth $5 billion or more, like General Electric (NYSE: GE).
Large-cap
Mutual funds that do not have a sales charge.
No-load funds
Smaller companies worth $250 million to $1 billion
Small-cap
One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, you determine the average price of all your shares, including those purchased with reinvested dividends and capital gains. That price becomes your cost basis.
Average cost
The Dow Jones Industrial Average is made up of 30 stocks. The index shares for the Dow 30 are commonly called Diamonds (NYSEMKT: DIA).
Dow Jones Industrial Average
A passively managed mutual fund that seeks to match the performance of a particular market index. Partially due to lower expenses, index funds outperform the majority of actively managed mutual funds.
Index Fund
Rate of return for any given year. Fools compare a fund's performance with that of the S&P 500 and other S&P index funds.
Performance (year)
Stocks that carry relatively low valuations, because slower growth is expected.
Value
These mutual funds are generally a combination of growth and value stocks.
Blended fund
The percentage of total assets used to pay for fund expenses.
Expense ratio
Mutual funds that have a sales charge.
Load funds
Fee levied for selling shares of your index fund. Usually a fixed percentage of the total value of your fund.
Redemption fee
One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, the shares sold are identified by specific purchase date. If you bought shares at different times, you can pick the ones you paid the most for and say that you sold them. That reduces the amount of your capital gain, but you get the same proceeds. This method requires accurate records. You also must notify your fund of the quantities and purchase dates of the shares to be sold. You should also get confirmation from the taxman.
Specific identification
In the world of bond investing, we don't see any reason to go anywhere but a bond index fund. The top dog is the Vanguard Total Bond Market Fund (VBMFX), which mimics the Lehman Brothers Aggregate Bond Index. There are also short-, intermediate-, and long-term bond funds
Bond index funds
One of three methods to determine the cost basis of the mutual fund shares you sell. Under FIFO, the first shares purchased are considered the first shares sold. This is the IRS's default method. Because these tend to be the lowest-priced shares, this method usually results in a higher gain. A higher gain means higher taxes.
First-in, first-out (FIFO)
Fee levied for management of the fund and/or shareholder administration services. Usually a fixed percentage of the total value of your fund that is assessed once a year.
Management fee
Every mutual fund issues a prospectus, which is written in the driest, most confusing, boring language possible. But, in essence, it will describe the investment style of the fund. It answers the following essential questions:
Prospectus
The Standard & Poor's 500 Index is usually considered the benchmark for U.S. equity performance. It represents 70% of all U.S. publicly traded companies. Part of the index's popularity is due to its close association with the largest mutual fund in the world, the Vanguard 500 Index Fund, and Spiders (NYSEMKT: SPY), the first exchange-traded fund (ETF).
S&P 500
Costs of record keeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund. The thriftiest funds can keep these costs below 0.20% of fund assets, while the ones who use engraved paper, colorful graphics, and phone answers with highfalutin' accents might fail to keep administrative costs below 0.40% of fund assets.
Administrative costs
Throughout the year, most mutual funds will receive dividends and interest on the securities they own. If the total passes the fund's annual expenses, you get the rest. Even if you reinvest those dividends, you have to pay ordinary income taxes on that money. That is to be expected - - it's money you made.
Dividends and interest
Money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund's assets.
Investment advisory fee or management fee
An index of 2,000 smaller-company stocks.
Russell 2000
Each fund also submits a Statement of Additional Information that can be obtained by contacting the investment company or by visiting the Securities and Exchange Commission's website. The SAI goes into much greater detail about many matters found in the prospectus, particularly the tax consequences of fund distributions but generally in a language that only a lawyer could love. If you think there's any chance you will want to sue your mutual fund company sometime down the road, be sure to read the SAI carefully since it's legally considered part of the prospectus.
Statement of Additional Information (SAI)