Mutual Fund Flashcards
12b-1 Fees
Fees paid out of fund assets to cover the costs of marketing and selling fund shares. “Distribution fees” include fees to compensate brokers and others who sell fund shares, and to pay for advertising, and printing and mailing prospectuses to new investors. “Shareholder Service Fees” are fees that cover the cost of responding to investor inquiries and providing investors with information.
Account Fee
A fee that some funds separately impose on investors for account maintenance. For example, individuals with accounts below a specified dollar amount may have to pay an account fee.
Back-end Load
A sales charge, also known as a “deferred sales charge,” investors pay when they redeem (sell) mutual fund shares. Funds generally use these to compensate brokers.
Classes
Different types of shares issued by a single fund, often referred to as Class A shares, Class B shares, and so on. Each class of a fund holds identical investments and shares the same investment objectives and policies. But each class has different shareholder services with different fees and expenses, and therefore, each class will have different performance results.
Closed-end Fund
A type of investment company that does not continuously offer its shares for sale but instead sells a fixed number of shares at one time. After its initial public offering, the fund typically trades on a market, such as the New York Stock Exchange or the NASDAQ Stock Market. Legally, they are known as a “closed-end company.”
Conversion
A feature some funds offer that allows investors to automatically switch from one fund class to another, typically one with lower annual expenses, after a set period of time. The fund’s prospectus or profile will state whether the fund has a conversion feature.
Deferred Sales Charge
A sales charge, also known as a “Back-end Load,” investors pay when they redeem (sell) mutual fund shares. Funds generally use these to compensate brokers.
Distribution Fees
Fees paid out of fund assets to cover marketing and selling fund shares. These fees may cover advertising costs, compensating brokers and others who sell fund shares, payments for printing and mailing prospectuses to new investors, and providing sales literature to prospective investors. Distribution fees sometimes are referred to as “12b-1 fees.”
Exchange Fee
A fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group.
Exchange-Traded Fund (ETF)
A type of exchange-traded investment product that must register with the SEC as either an open-end investment company (generally known as “funds”) or a unit investment trust. ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. ETF shares are traded on a national stock exchange.
Expense Ratio
The fund’s total annual operating expenses, including management fees, distribution fees, and other expenses, expressed as a percentage of average net assets.
Front-end Load
An upfront sales charge investors pay when they buy fund shares. It generally is used by the fund to compensate brokers. A front-end load is deducted from the purchase and reduces the amount available to buy fund shares.
Index Fund
A type of mutual fund whose investment objective typically is to achieve approximately the same return as a particular market index, such as the Standard & Poor’s 500 Index, the Russell 2000 Index, or the Wilshire 5000 Total Market Index.
Investment Company
A company that issues and invests in securities. The three types of investment companies are mutual funds, closed-end funds, and unit investment trusts.
Load
The amount that investors pay when they buy (front-end load) or redeem (back-end load) shares in a mutual fund, similar to a commission. The SEC’s rules do not limit sales loads a fund may charge, but FINRA’s rules cap mutual fund sales loads at 8.5% of the purchase or sale, or at lower levels, depending on other fees and charges.
Management Fee
A fee paid out of fund assets to the fund’s investment adviser for investment portfolio management. A fund’s management fees appear under Annual Fund Operating Expenses in the fee table in the fund’s prospectus.
Market Index
A measurement of the performance of a specific “basket” of stocks considered to represent a particular market or sector of the U. S. economy. For example, the Dow Jones Industrial Average (DJIA) is an index of 30 “blue chip” stocks of U.S. companies.
Mutual Fund
The common name for an open-end investment company. Like other types of investment companies, mutual funds pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds issue redeemable shares that investors buy directly from the fund or through a broker for the fund instead of from other investors.
No-load Fund
A fund that does not charge any type of sales load. But not every type of shareholder fee is a “sales load,” and a no-load fund may charge fees that are not sales loads. No-load funds also charge operating expenses.
Open-end Company
The legal name for a mutual fund. An open-end company is a type of investment company.
Operating Expenses
The costs a fund incurs in running the fund, including management fees, distribution fees, and other expenses.
Prospectus
A document that describes the mutual fund to prospective investors. Every mutual fund provides a prospectus with information about the mutual fund’s investment objectives, risks, past performance, and expenses. You can get a prospectus from the mutual fund company’s website or by mail. A broker or other financial professional also can provide you with a copy.
Purchase Fee
A shareholder fee that some funds charge when investors buy mutual fund shares. This is not the same as, and may be in addition to, a front-end load.
Redemption Fee
A shareholder fee that some funds charge when investors redeem (sell) mutual fund shares. Redemption fees, which must be paid to the fund, are not the same as and may be in addition to a back-end load, which is typically paid to a broker. The SEC generally limits redemption fees to 2% of the sales amount.
Sales Charge (or Load)
The amount that investors pay when they buy (front-end load) or redeem (back-end load) shares in a mutual fund, similar to a commission. The SEC’s rules do not limit sales loads a fund may charge, but FINRA’s rules cap mutual fund sales loads at 8.5% of the purchase or sale, or at lower levels, depending on other fees and charges.
Shareholder Service Fees
Fees paid to respond to inquiries from investors and provide them with information about their investments.
Total Annual Fund Operating Expense
The total of a fund’s annual fund operating expenses, expressed as a percentage of the fund’s average net assets. You’ll find the total in the fund’s fee table in the prospectus.
