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Investopedia’s Top 250 Mutual Fund Terms

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100% EQUITIES STRATEGY An investment strategy for an individual portfolio or pooled funds vehicle such as a mutual fund. Only equity securities are considered for investment, whether they be listed stocks, over-the-counter stocks, or private equity shares. A mutual fund or ETF will often state a "100% equities strategy" in its prospectus to inform potential investors of the fund's overall risk profile. Equities are generally considered the riskier asset class over both bonds and cash, but historical returns have been higher as well. A well diversified portfolio of all stocks can protect against individual company risk or even sector risk, but market risks will still exist that can affect the equities asset class. All-stock portfolios will perform best when the underlying economy is growing (as measured by GDP) and inflation is low to moderate, as inflation diminishes the future cash flows of equities. 12B-1 FEE An annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25-1% (the maximum allowed) of a fund's net assets. The fee gets its name from a section in the Investment Company Act of 1940. Back in the early days of the mutual fund business, the 12b-1 fee was thought to help investors. It was believed that by marketing a mutual fund, its assets would increase and management could lower expenses because of economies of scale. This has yet to be proved. With mutual fund assets passing the $10 trillion mark and growing steadily, critics of this fee, which today is mainly used to reward intermediaries for selling a fund's shares, are seriously questioning the justification for using it. As a commission paid to salespersons, it is currently believed to do nothing to enhance the performance of a fund. 12B-1 PLAN A no-load mutual fund that is allowed to use fund assets to pay for distribution costs rather than charging a 12b-1 fee. The 12b-1 fee is an annual percentage charge based on the current value of the investment. The Government typically restrict this to 1%.

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A-SHARE 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. ABSOLUTE RETURN The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - achieves over a given period of time. Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark. In general, a mutual fund seeks to produce returns that are better that its peers, its fund category, and/or the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. ACCUMULATION PLAN 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. 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.

AQUIRED FUND FEES AND EXPENSES (AFFE) A line item in a fund-of-funds' prospectus that shows the operating expenses of the underlying funds. This became a requirement as of January 2007 and this information is found beneath the "Fees and Expenses" heading. A check of Morningstar and Standard & Poor's fund reports indicates that investment research firms are reporting a fund-of-funds'

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expense ratios with AFFE included. Previously, in many instances, a fund-of-funds' expense ratio was reported as zero, which meant that while there weren't any expenses incurred by the fund-of-funds per se, there would be operating expenses incurred by the various underlying funds in the portfolio. The new AFFE disclosure now fills in that blank. ACTIVE MANAGEMENT Refers to the use of a human element, such as a single manager, co-managers, or a team of managers to actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is called passive management, better known as "indexing". 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 that aim to identify mispriced securities. Investment companies and fund sponsors, who believe it is possible to outperform the market, employ professional investment managers to manage one or more of the company's mutual funds. The objective with active management is to produce better returns than those of passively managed index funds. For example, if you are a large-cap stock fund manager, you want to beat the performance of the Standard & Poor's 500 Index. Unfortunately, for a large majority of active managers, this has been difficult. This phenomenon is simply a reflection of how hard it is, no matter how smart the manager, to beat the market. ACTIVE RISK A type of 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.

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ADVISOR In the context of the mutual fund business, an advisor, also known as an investment advisor, is an organization employed by an investment company to manage a particular fund's portfolio. A fund's advisor assigns a manager(s) to make the day-to-day decisions involved in the purchase and sale of a fund's securities according to stated strategies and investment objectives. It's a good idea to choose an advisor carefully according to his or her professional credentials, experience and expertise. Fees and services provided are also important considerations. AFTER REIMBURSEMENT EXPENSE RATIO The actual expense paid by mutual fund investors. The after reimbursement expense ratio is calculated by subtracting any reimbursements made to the fund by the management and contractual fee waivers from the gross expense ratio. Also known as the "net expense ratio". Management will often reimburse the fund for indirect expenses, such as any dividends paid for short positions in stock. Sometimes the expense ratio will be voluntarily limited by the managers through a fee waiver to keep the fund's pricing competitive. Fee waivers allow the fund to set a maximum level on the amount charged to shareholders. When a fund adopts an expense limit, it is referred to as a capped fund.

AGGRESSIVE GROWTH FUND 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. 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. Also commonly referred to as a "capital appreciation fund" or "maximum capital gains fund".

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ALL WEATHER FUND A mutual fund that tends to perform reasonably well during both favorable and unfavorable economic and market conditions. This type of investment result is accomplished, in most cases, through portfolio diversification, by employing a combination of asset classes, and/or using a variety of hedging strategies. In other words a fund that does well regardless of what the stock market does. In the universe of mutual funds, there is no formal "all weather fund" category. However, a number of fund types qualify for the moniker because of the nature of their portfolios and/or how they are managed. For example, a simple balanced fund (stock and bond) with a 60% equity and a 40% fixed-income portfolio comes close to fitting the all-weather description. An asset-allocation fund (stock, bond and cash equivalents) will also qualify if the proportional representation of its asset classes falls into the moderate style.

ALL-CAP FUND A stock mutual fund that invests in equity securities without regard to whether a company is characterized as small, medium or large. The term "cap" is shorthand for capitalization. The investment community measures a company's size by its market capitalization, which is calculated by multiplying the number of a company's outstanding shares by its current stock price.

There is no universal consensus on the exact definitions of the various market caps, but the following parameters are a good approximation: Giant or Mega Cap: Above $200 billion Large Cap: From $10 billion to $200 billion Mid Cap: From $2 billion to $10 billion Small Cap: From $300 million to $2 billion Micro Cap: Less than $300 million These designations inform mutual fund investors about the investment focus of the fund in terms of company size. In the case of an all-cap fund, the portfolio manager has complete freedom to invest in companies of any size. Because of the inclusive nature of its holdings, a total stock market index fund would have an all-cap portfolio.

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ALLOCATION RATE The percentage of an investor's initial cash or capital outlay that actually goes toward the final investment. This amount is net of any fees that may be incurred upon initial investment and is effectively the amount that is exposed to the investment. For example, if a mutual fund carries a 4% front-end load, only 96% of an investor's initial investment will actually be placed into the fund itself, with the rest going to the investment company. The higher the fees, the lower the overall allocation rate will be for the investor. Management companies, pension managers and the like all charge some percentage fee for their services. More choices usually means higher allocation rates for investors, but buyers must always beware of exorbitantly high load fees or upfront costs for any investment. Stock and bond index funds remain one of, if not the highest, allocation rate vehicles available to investors who do not wish to actively manage their own portfolios. ALPHA 1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. 2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM). If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model.

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ALPHA GENERATOR Any security that, when added to an existing portfolio of assets, generates excess returns or returns higher than a pre-selected benchmark without additional risk. An alpha generator can be any security; this includes government bonds, foreign stocks, or derivative products such as stock options and futures. Keep in mind that alpha itself measures the returns a portfolio produces in excess of the return originally estimated by the capital asset pricing model, on a risk-adjusted basis. Therefore, an alpha generator adds to portfolio returns without adding any additional risk, as measured by volatility or downside volatility. This follows modern portfolio theory in allowing investors to maximize returns while keeping a certain level of risk. ANNUAL REPORT In the case of mutual funds, an annual report is a required document that is made available to fund shareholders on a fiscal year basis. It discloses certain aspects of a fund's operations and financial condition. In contrast to corporate annual reports, mutual fund annual reports are best described as "plain vanilla" in terms of their presentation. A mutual fund annual report, along with a fund's prospectus and statement of additional information, is a source of multi-year fund data and performance, which is made available to fund shareholders as well as to prospective fund investors. Unfortunately, most of the information is quantitative rather than qualitative, which addresses the mandatory accounting disclosures required of mutual funds. ANNUAL TURNOVER The percentage rate at which a mutual fund or exchange-traded fund replaces its investment holdings on an annual basis. Turnover is meant to adjust for the inflows and outflows of cash and report on the level of trading activity in the fund. Annual turnover is a good way to inspect the average time horizon a fund employs. Higher turnover levels will generally add to the expense ratio of a fund and could increase capital gains distributions. Benchmark funds like the S&P 500-matching SPDRs have very low turnover, usually less than 10% per year. On the other end of the spectrum, some funds employ highly active trading strategies that push annual turnover past 100% per year (100% is a full turnover of the

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portfolio). ANTI-RECIPROCAL RULE A rule created by the Financial Industry Regulatory Authority (FINRA) 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 FINRA (formerly the NASD) if there is proof that they have violated anti-reciprocal rules. APPRAISAL RATIO 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 residual standard deviation.

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 managers' performance 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. APPROVED LIST 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 account 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

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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. ASSET ALLOCATION An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time. There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results. Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt to provide investors with portfolio structures that address an investor's age, risk appetite and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.

ASSET ALLOCATION FUND - AAF A mutual fund that provides investors with a portfolio of a fixed or variable mix of the three main asset classes - stocks, bonds and cash equivalents - in a variety of securities. Some asset allocation funds maintain a specific proportion of asset classes over time, while others vary the proportional composition in response to changes in the economy and investment markets. Asset allocation mutual funds come in several varieties. Generally, a

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"balanced fund" implies a fixed mixed of stocks and bonds, such as 60% stocks and 40% bonds. "Life-cycle" or "target-date" funds, which are often used in retirement plans, usually have a mix of stocks, bonds and cash equivalent securities that start out with a higher risk-return position and gradually become less risky as the investor ages and/or nears retirement. So-called "life-style," or actively-managed asset-allocation funds provide the active management of a fund's asset classes in response to market conditions. ASSET CLASS A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments). It should be noted that in addition to the three main asset classes, some investment professionals add real estate and commodities, and possibly other types of investments, to the asset class mix. Whatever the asset class lineup, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment. Asset classes and asset class categories are often mixed together. In other words, describing large-cap stocks or short-term bonds asset classes is incorrect. These investment vehicles are asset class categories, and are used for diversification purposes. ASSET CLASS BREAKDOWN The relative percentages of core asset classes such as equities, fixed income and cash, along with real estate and international holdings, found within a mutual fund, exchange-traded fund or other portfolio. Further breakdowns are sometimes made within the asset classes into growth stocks, value stocks, market capitalizations (small, medium, large) and various types of fixed income such as government bonds, corporate bonds and municipal bonds. Asset class breakdowns are calculated by dividing the market value of a particular asset class's holdings by the total fund or portfolio assets. The asset class breakdown is a simple way to determine the approximate risk profile of a fund. Higher equities exposure equates to a higher potential return, but with greater risk than a portfolio made up of mostly bonds. Many analysts and economists feel that proper asset

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allocation is the biggest determinant of overall returns - far greater than sector selection or individual security selection. ASSET MANAGEMENT COMPANY A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves. Mutual funds, hedge funds and pension plans are all run by asset management companies. These companies earn income by charging service fees to their clients. AMCs offer their clients more diversification because they have a larger pool of resources than the individual investor. Pooling assets together and paying out proportional returns allows investors to avoid minimum investment requirements often required when purchasing securities on their own, as well as the ability to invest in a larger set of securities with a smaller investment. ASSET SIZE The total market value of the securities in a mutual fund's portfolio. Total assets or total net assets are also used to describe a fund's size. When it comes to the size of a mutual fund, bigger is not necessarily better. The key to a fund's investment quality, in terms of the amount of money under management, lies in the compatibility of a fund's asset size and its investment style. So-called "asset bloat" is not much of a problem for bond, index and money market funds, which generally operate in large market segments that are very liquid and are less affected by large block trading transactions. With these funds, bigger is actually better because expenses can be spread over more investment assets. However, if a managed stock fund gets flooded with new money, the investment managers may find it difficult to invest it in an efficient manner. As fund assets rise, the number of appropriate new stock prospects shrink and transaction costs increase, which makes maintaining the fund's investment style difficult. ASSETS UNDER MANAGEMENT - AUM In general, the market value of assets an investment company manages on behalf of investors.

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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. AUTOMATIC INVESTMENT PLAN 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.

AUTOMATIC REINVESTMENT PLAN 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, instead of being distributed to the investor as cash. By using an automatic reinvestment plan, an investor is able to easily make use of his or her 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.

AVERAGE ANNUAL RETURN - AAR A percentage figure used when reporting the historical return, such as the three-, five- and 10-year average returns of a mutual fund. The average annual return is stated net of a fund's operating expense ratio, which does not include sales charges, if applicable, or portfolio transaction brokerage commissions 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

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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, which is definitely not a return of 0%.

B-SHARE A class in a family of multi-class mutual funds. This class is characterized by a back-end load structure that is paid only when the fund is sold. 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. BACK-END LOAD A fee (sales charge or load) that investors pay when selling mutual fund shares within a specified number of years, which usually ranges between five to ten years. The fee amounts to a percentage of the value of the share being sold. The fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero. Also known as a "contingent deferred sales charge or load." The back-end load is a type of sales charge that is used with mutual funds that have share classes, which in this case are identified as Class B shares. Class A shares charge a front-end load that is taken from an investor's initial investment. Class C shares are considered to be a type of level-load fund - no front-end and low back-end loads, but the fund's operating expenses are high. In all cases, the load is paid to a financial intermediary, and is not included in a fund's operating expenses. In essence, funds with share classes carry sales charges (as opposed to no-load funds). The class you choose is what determines how much and when you pay them. In employer-sponsored retirement plans, the loads are generally waived. BALANCED FUND A fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks

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and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. A balanced fund is geared toward investors who are looking for a mixture of safety, income and modest capital appreciation. The amounts that such a mutual fund invests into each asset class usually must remain within a set minimum and maximum. Although they are in the "asset allocation" family, balanced fund portfolios do not materially change their asset mix. This is unlike life-cycle, target-date and actively managed asset-allocation funds, which make changes in response to an investor's changing risk-return appetite and age, or overall investment market conditions.

BEFORE REIMBURSEMENT EXPENSE RATIO The percentage of a fund's average net assets that is used to cover the annual operating expenses of managing a mutual fund before reimbursements are made to the fund by managers. Also known as the "gross expense ratio". A mutual fund's operating expenses include management fees, transaction costs and other business costs. Some of these expenses may be reimbursed by management. Reimbursed fees often include indirect fees such as transaction costs from dealing with other mutual funds, transaction costs associated with exchange traded funds, or the dividends paid out from a short position on an asset. Reimbursements also occur when a fund's expense ratio is limited. In capped funds, an expense limit is created to place a ceiling on the charges to the fund's shareholders. The limit is often expressed as a percentage and is a highlighted in the fund's prospectus.

BENCHMARK A standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose. When evaluating the performance of any investment, it's important to compare it against an appropriate benchmark. In the financial field, there are dozens of indexes that analysts use to gauge the performance of any given investment including the S&P 500, the Dow Jones Industrial Average, the Russell 2000 Index and the Lehman Brothers Aggregate Bond Index.

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BETA A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole. Also known as "beta coefficient." Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2 it's theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely most high-tech Nasdaq-based stocks have a beta greater than 1, offering the possibility of a higher rate of return but also posing more risk.

BLEND FUND A category of equity mutual funds with portfolios that are made up of a mix of value and growth stocks. This is also referred to as a "hybrid fund".

A blend mutual fund has its origins in the graphical representation of a fund's essential characteristics in an equity style box, which was created and popularized by the investment research firm, Morningstar, Inc. A style box for stocks contains nine squares. The vertical axis is divided into three categories, which represent company size - large, medium, and small - as determined by a fund's market capitalization. The horizontal axis is also divided into three categories based on the stocks in a fund's stock portfolio: value, value/growth blend and growth stocks. As such, there are three versions of a stock blend fund, which would be differentiated simply by company size. BOGEY A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the investment scope of the funds investment. Comparing a fund's performance to a benchmark index gives investors an idea of how well the fund is doing compared to the market. Also known referred to as "bogy". For example, the performance of a 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 bogey, when talking of its over- or underperformance to the fund. One of the most

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common benchmarks is the S&P 500 index. BOND FUND A fund invested primarily in bonds and other debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities.

For investors interested in bonds, a Morningstar bond style box can be used to sort out the investing options available for bond funds. Investors should note that U.S. government bonds are considered to be of the highest credit quality and are not subject to ratings.

BREAKPOINT For load mutual funds, the dollar amount for the purchase of the fund's shares that qualifies the investor for a reduced sales charge (load). The purchase may either be made in a lump sum or by staggering payments within a prescribed period of time. The latter form of investment purchase in a fund must be documented by a letter of intent.

For example, suppose that an investor plans to invest $95,000 in a front-end load mutual fund and faces a sales charge of 6.25%, or $6,125. If a breakpoint of $100,000 exists with a lower sales charge of 5.5%, the investor should be advised to invest an additional $5,000. If the investor can add another $5,000 to the investment, he or she would benefit from a lower breakpoint sales charge of $5,500, or a savings of $625 on this transaction. Mutual funds are required to give a description of these breakpoints and the eligibility requirements in the fund prospectus. By reaching or surpassing a breakpoint, an investor will face a lower sales charge and save money. Any investor purchase of fund shares that occurs just below a breakpoint is considered unethical and in violation of FINRA (formerly the NASD) rules. BREAKPOINT SALE 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

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period. Any sales that occur just below a breakpoint are considered unethical and in violation of FINRA (formerly the 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. BROKE THE BUCK When a money market mutual fund's net asset value (NAV) drops below $1 per share. Money market funds aren't federally insured like bank deposits; therefore, fund assets have an implied promise to preserve capital at all costs and preserve the $1 floor on share prices. These funds are regulated by the Securities and Exchange Commission and Rule 2a-7 restricts what they can invest in based on credit quality and maturities with the hope of ensuring principal stability. Breaking the buck is an extremely rare event that money market fund managers always want to avoid, but it can occur if the underlying fund investments (which are generally assumed to be completely safe) significantly drop in value. This can happen if the underlying investments suffer large losses, such as defaults or strong moves in interest rates. Several funds reached or approached this critical point (from an investor faith standpoint) during the credit crisis that occurred as a result of a drop in mortgage-related assets beginning in 2007.

C-SHARE 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.

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CALMAR RATIO 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. CAPITAL APPRECIATION FUND 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.

CAPITAL GAINS DISTRIBUTION 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 is reduced from the distribution. CAPITAL GAINS EXPOSURE (CGE) An assessment of the extent to which a stock fund or other similar

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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.

CAPITAL GUARANTEE FUND An investment vehicle, offered by certain institutions, that guarantees the investor's initial capital investment from any losses. Even though these products prevent investors from losing their invested capital, they also limit the amount of return that investors can obtain if the investments appreciate. This is how the offering institutions can afford to guarantee the principal investment. CAPPED FUND A mutual fund that has a limited amount of operating expenses that can be charged annually to shareholders. The limit is expressed as a ratio of total operating expenses divided by the fund's average net assets. The fund's investment advisor will disclose the expense limit in the prospectus. Limiting the expense ratio of a mutual fund provides investors with a fee ceiling. While the cap provides investors with the highest fee to expect, the cap can also be removed by the fund manager. The fund's prospectus will often state when the expense limit will expire or change. The expense limit can be measured with either the before or the after reimbursement expense ratios.

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CAPTIVE FUND 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.

CASH EQUIVALENTS Investment securities that are short-term, have high credit quality and are highly liquid. Also referred to as "cash and equivalents".

Cash equivalents are one of the three main asset classes, along with stocks and bonds. These securities have a low-risk, low-return profile. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper and other money market instruments.

CASH PLUS FUND A type of fund, commonly found in Australia, that is formulated for conservative investors seeking preservation of capital and reasonable investment returns. The portfolio managers of cash plus funds invest in a mixture of high-yield, fixed-income securities and money market securities. The success of these funds is commonly compared to the UBS Australian Bank Bill Index and the fees are generally very low.

CERTIFIED FUND SPECIALIST - CFS 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 FINRA (formerly the NASD), and an open-book case study.

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CLASS OF SHARES With load mutual funds, there are three share classes, Class A, Class B and Class C, which carry different sales charge, 12b-1 fees and operating expense structures. Class A mutual fund shares charge a front-end load, have lower 12b-1 fees and a below-average level of operating expenses. Class B mutual fund shares charge a back-end load and have higher 12b-1 fees and operating expenses. Class C mutual fund shares are considered level-load - there's no front-end load but a low back-end load applies, as do 12b-1 fees and relatively higher operating expenses.

CLONE FUND 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.

CLOSED FUND A mutual fund that has been closed - either temporarily or permanently - to new investors because the investment advisor has determined that the fund's asset base is getting too large to effectively execute its investing style Generally, current shareholders in a closed mutual fund are permitted to continue investing in the fund, but sometimes they are also be precluded from making additional investments. A closed mutual fund should not be confused with a closed-end fund. This type of fund has a fixed number of shares, generally invests in specialized sectors, and is structured and listed as a stock on a stock exchange

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CLOSED TO NEW ACCOUNTS When an investment vehicle is no longer accepting new investors, but is still operating for existing investors. This can apply to mutual funds, hedge funds or any professionally managed pooled investment vehicle. In addition, institutional money managers may close certain portfolio groups to new accounts, while leaving others open. There will be an "as of" date when the fund will officially close to new investors. Depending on the situation, this may or may not also affect the ability for current investors to add to their holdings in the fund. The managers of a fund can choose to close for new investors for several reasons, but the most noticeable is to control the size of the fund and to lower the administrative costs. Generally speaking, the smaller a fund, the more nimble it can be and the more markets in which it can participate. Some mutual funds become so large that monthly inflows can amount to billions of dollars. Over time, the expected return from new money will drag down the returns of current investors. Closing a fund off to new accounts is only one method of controlling the asset base's growth. Other means include raising the minimum investment amount and/or stopping existing investors from contributing more to the fund. CLOSED-END FUND A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange. Also known as a "closed-end investment" or "closed-end mutual fund." Despite the name similarities, a closed-end fund has little in common with a conventional mutual fund, which is technically known as an open-end fund. The former raises a prescribed amount of capital only once through an IPO by issuing a fixed amount of shares, which are purchased by investors in the closed-end fund as stock. Unlike regular stocks, closed-end fund stock represents an interest in a specialized portfolio of securities that is actively managed by an investment advisor and which typically concentrates on a specific industry, geographic market, or sector. The stock prices of a closed-end fund fluctuate according to market forces (supply and demand) as well as the changing values of the securities in the fund's holdings.

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CLOSED-END MANAGEMENT COMPANY 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.

COLLECTIVE FUND 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.

COMMINGLED FUND A fund consisting of assets from several accounts that are blended together. Investors in commingled fund investments benefit from economies of scale, which allow for lower trading costs per dollar of investment, diversification and professional money management. Sometimes called a "pooled fund." These funds are "commingled" to reduce the costs of managing them separately. The main disadvantage of these funds is that capital gains are spread evenly among investors. CONDUIT THEORY A theory stating that an investment firm that passes all capital gains, interest and dividends on to its customers/shareholders shouldn't be levied at the corporate level like most regular companies. An example

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of such a company is a real estate investment trust or a mutual fund company.

The firm passes income (without taxing itself) directly to the investors who are then taxed as individuals. Conduit theory suggests that investors in these types of firms should only be taxed once on the same income, unlike in regular companies, where investors are taxed twice (at the corporate and then individual level). CONSERVATIVE GROWTH An investment strategy that aims to grow invested capital over the long term. This 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 a fund that uses a conservative growth model, 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. CONTINGENT DEFERRED SALES CHARGE - CDSC A fee (sales charge or load) that mutual fund investors pay when selling Class-B fund shares within a specified number of years of the date on which they were originally purchased. Also known as a "back-end load" or "sales charge". For mutual funds with share classes that determine when investors pay the fund's load or sales charge, Class-B shares carry a contingent deferred sales charge during a five- to 10-year holding period calculated from the time of the initial investment. The fee amounts to a percentage of the value of the shares being sold. It is highest in the first year of the specified period and decreases annually until the period ends, at which time it drops to zero. As a mutual fund investor, if you were to buy and hold Class-B fund shares until the end of the specified period, you could avoid paying this type of fund's sales charge, thereby enhancing your investment return. Unfortunately, fund research indicates that mutual fund investors are holding their funds, on average, for less than five years, which often triggers the application of a back-end sales charge in a Class-B share

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fund investment. CORE PLUS A fixed-income investment management style that permits managers to add instruments with greater risk and greater potential return - high-yield, global and emerging market debt, for example - to core portfolios of investment-grade bonds. Investment advisors will advocate building portfolios with core holdings that consist of securities and/or mutual funds that reflect market positions and performance prospects that are so strong that these holdings may be maintained in the portfolio virtually forever. Such holdings might represent as much as 75% of the portfolio. The remaining balance would then consist of higher risk holdings, which may have shorter investment horizons than the core component of the portfolio. As such, a portfolio's core investments would represent a solid foundation to which more aggressive, diversified investments could be added. With mutual funds, the core designation is used to describe categories of large-cap, mid-cap, small-cap, multi-cap and international funds that represent a blend of stocks in the value and growth investment styles. COUNTRY FUND An international mutual fund with a portfolio that consists entirely of securities, generally stocks, of companies located exclusively in a given country. Investors should be aware that country funds often show up in performance tables with some spectacular results and, because of this phenomenon, will attract a lot of investor attention. However, along with this type of performance also comes a high level of risk and price volatility, especially in developing countries, which are usually categorized as emerging markets. In this instance, a fund's portfolio may be concentrated in a small number of issues with very low market liquidity. Even in developed markets like Europe, putting investment funds in a single-country fund means that you are subjecting your risk-return expectations to a relatively narrow market environment.

CREATION UNIT 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

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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. CROSSOVER FUND An investment fund that has investment holdings in both public and private equity. This is to say that it invests in companies that are traded publicly, and in companies that are privately held. To find out if a fund is a crossover fund, simply look at the general investments that it makes, either by examining its holdings, or by looking at the fund's prospectus. If you realize the fund does hold both public and private equity, then that particular fund is indeed a crossover fund. These funds are typically high yield/high growth funds.

CUMULATIVE RETURN The aggregate amount that an investment has gained or lost over time, independent of the period of time involved. Presented as a percentage, the cumulative return is the raw mathematical return of the following calculation:

Investors are more likely to see a compound return than a cumulative return, as the compound return figure will be annualized. This helps investors to compare different investment choices. A common way to present the "effect" of a mutual fund's performance over time is to show the cumulative return with a visual such as a mountain graph. Investors should check to confirm whether interest and/or dividends are included in the cumulative return; such payouts may be assumed to be re-invested or simply counted as raw dollars when calculating the cumulative return. Any marketing material for a mutual fund or similar investment should state any assumptions clearly when presenting such performance data.

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CURRENT INCOME The investment objective for a moderately conservative portfolio of securities or mutual funds that provides high dividend and annuity payments to satisfy an investor's steady income requirements. Current income portfolios are often created for individuals in their retirement years because steady income is needed for living expenses. Income garnered from a current income fund is derived from bond interest payments, dividends and annuity payments. A current income portfolio is moderately conservative, as it often contains a large percentage of fixed-income securities, in addition to other assets such as blue-chip stocks and annuities. A current income portfolio can also include mutual funds within the same asset categories and strategies, such as a government bond fund and a dividend fund. DEBT FUND An investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The fee ratios on debt funds are lower, on average, than equity funds because the overall management costs are lower. The main investing objectives of a debt fund will usually be preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration to absolute return when investing in a debt fund. DISCOUNT TO NET ASSET VALUE A pricing situation that occurs with a closed-end mutual fund when its market price is currently lower than the net asset value of its components. Discounts can occur in times where the market has a pessimistic future outlook and fund investors have started to sell their holdings. Also known as "discount to NAV". This phenomenon only occurs in closed-end funds. Open-end funds, on the other hand, are not as affected by supply and demand because they are bought and sold at prevailing net asset values. While a discount NAV could be an indication that the underlying assets in a fund will dip in value, it could also be a temporary market over-reaction. Moreover, the fund manager may decide to buy back shares of the fund to remove the discount and restore the fund's value back to its net

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asset value.

DIVERSIFIED COMMON STOCK FUND A mutual fund that invests its assets in a relatively large number and variety of common stocks. The investment manager for this type of fund is not restricted in terms of company size or investment style A diversified common stock fund will generally tend to a portfolio of stocks in the range of 100 or more issues with large cap, mid cap and small cap company sizes that reflect a combination of value, growth, and blended (value-growth mix) investment styles. DIVERSIFIED FUND An investment fund that contains a wide array of securities to reduce the amount of risk in the fund. Actively maintaining diversification prevents events that affect one sector from affecting an entire portfolio, make large losses less likely.

A diversified fund contrasts with specialized or focused funds, such as sector funds, which focus on stocks in specific sectors such as biotechnology, pharmaceuticals or utilities, or in particular regions such as Asia or Europe.

DIVIDEND Mandatory distributions of income and realized capital gains made to mutual fund investors. Mutual funds pay out interest and dividend income received from their portfolio holdings as dividends to fund shareholders. In addition, realized capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) as a year-end dividend.

DIVIDEND FREQUENCY How often a dividend is paid by an individual stock or fund. The most common dividend frequencies are annually, biannually and quarterly. There are no uniform calendar dates for when dividends are paid; it depends on the individual company's fiscal calendar. Special or one-time dividends are not measured in terms of their frequency because they only appear sporadically.

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While the dividend rate of a security (such as a common stock) may be in constant flux, the dividend frequency will rarely change. Most equity investors are used to receiving quarterly dividends for the stocks that have instituted a dividend. Monthly dividends, although uncommon, can also be found, typically in securities or funds with extremely dependable cash flows.

DOLLAR-COST AVERAGING - DCA The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Also referred to as “constant dollar plan”. Eventually the average cost per share of the security will become smaller and smaller. Dollar-cost averaging lessens the risk of investing a large amount in a single investment at the wrong time. In the U.K., it is known as "pound-cost averaging". DUAL PURPOSE FUND A fund created by a closed-ended investment company that offers two classes of stock. Each class offers entitlements to either income or capital appreciation. The two types of stock offered by a dual purpose fund are capital and income. The fund's two kinds of potential cash flows allow individual investors to choose a specific class that is more in line with their investment objectives.

DURATION A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk or reward for bond prices. The duration number is a complicated calculation involving present value, yield, coupon, final maturity and call features. Fortunately for investors, this indicator is a standard data point provided in the presentation of comprehensive bond and bond mutual fund information.

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It is a common misconception among non-professional investors that bonds and bond funds are risk free. They are not. Investors need to be aware of two main risks that can affect a bond's investment value: credit risk (default) and interest rate risk (rate fluctuations). The duration indicator addresses the latter issue. Short-term, intermediate-term and long-term bond funds will have different durations. For example, Vanguard's short-, intermediate- and long-term bond index funds generally have durations of around three years, six years and 11 years, respectively. EFFICIENT FRONTIER A line created from the risk-reward graph, comprised of optimal portfolios.

The optimal portfolios plotted along the curve have the highest expected return possible for the given amount of risk.

EMERGING MARKET FUND A mutual fund or exchange-traded fund that invests the majority of its assets in the financial markets of a single developing country or a grouping of developing countries. For the most part, these countries are in Eastern Europe, Africa, the Middle East, Latin America, the Far East and Asia. A developing country is characterized as being vulnerable to political

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and economic instability, having low average per-capita incomes, and of being in the process of building its industrial and commercial base. The "emerging market" label has been adopted by the investment community to identify developing countries with superior growth prospects. Obviously, potentially rewarding investment opportunities in this category of fund come with relatively high risk.

ENHANCED INDEX FUND A mutual fund that tracks a stock market index, but with certain modifications in place to allow for more equivalent position sizes, the exclusion of certain securities, or the use of leverage, all with the goal of beating the return of the tracking index. These types of funds are actively managed, and will often use the S&P 500 Index as the tracking index.

Enhanced index funds trade with the "index fund" title, but to be fair, that's where the similarity usually ends. True index funds have consistently lower fees, lower turnover and passive management. Enhanced index funds, on the other hand, are actively managed to beat the return of the tracking index. This approach causes relatively higher fees and turnover than the traditional index fund. While proponents of enhanced index funds cite better total return performance as a plus for this type of fund, investors need to be aware that using leverage and active management also increases risk, at least as compared to a conventional index fund. EQUITY FUND A mutual fund that invests principally in stocks. It can be actively or passively (index fund) managed. Also known as a "stock fund". Stock mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography. Size is determined by a company's market capitalization, while the investment style, reflected in the fund's stock holdings, is also used to categorize equity mutual funds. Stock funds are also categorized by whether they are domestic (U.S.) or international. These can be broad market, regional or single-country funds. There are so-called "specialty" stock funds that target business sectors such as healthcare, commodities and real estate.

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EQUITY INCOME A type of mutual fund that invests in high-quality companies with a reliable history of dividend payments and growth in the dividend rate. 1. A shareholder receives equity income usually through dividends or capital gains. In the context of mutual funds, the investment objective will be a combination of generating both moderate current dividend income and moderate capital appreciation.

EQUITY STYLE BOX A visual representation of the principle investment characteristics of stocks and stock mutual funds. The style box was created by Morningstar and is a valuable tool for investors to use to determine the risk-return structures of their stocks/stock portfolios and/or how these investments fit into their investing criteria. Also known as a "stock style box".

An equity style box is comprised of nine squares, or categories, with the investment features of stocks/stock mutual funds presented along its vertical and horizontal axes. For stocks and stock funds, the horizontal axis is divided into three investment style (objective) categories: value, blend (a value/growth mix) and growth. The vertical axis is divided into three company-size (based on market capitalization) indicators: large, medium and small. A stock investor looking for relative safety would confine his or her stock or stock fund investments to the large category for company size,

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combined with selections in the value and blend in the investment style categories. For a risk taker, the category combination of small company (small-cap) and growth will provide a high-risk, high-return opportunity. EXCHANGE PRIVILEGE The opportunity given to mutual fund shareholders to exchange their investment in a fund for another within the same fund family at no additional cost. This privilege allows investors to switch funds when market conditions change. For example, you might want to be in an aggressive growth fund when the market is going up, but when the markets start heading downward, you may switch to a bond fund. There is usually a limit to how many times an investor can switch funds within a year. EXIT FEE A fee or charge assessed to an investor for withdrawing money prior to a previously stipulated date. This is almost always expressed and charged as a percentage of assets rather than a flat fee. May also be known as a "redemption fee", "back-end load" or "contingent deferred sales charge". Exit Fees may be found not only on mutual funds as back-end loads, but also on hedge funds, annuities and limited partnership units. Often the managers of these funds employ investing strategies that keep daily liquidity to a minimum, and the exit fees act as a deterrent to early withdrawals. EXPENSE LIMIT A limit placed on the operating expenses incurred by a mutual fund. The expense limit is expressed as a percentage of the fund's average net assets and represents a cap to the fees a shareholder may be charged. Expense limits are often voluntarily placed on a fund by its manager. The addition of an expense limit can make a fund more attractive, as investors are fully aware of the maximum percentage they may be charged. With an expense limit, fees will never be above the stated percentage; however, the fund may charge under the stated limit. Funds that use an expense limit are referred to as capped funds, since the limit caps the fees that shareholders can be charged.

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EXPENSE RATIO A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. Also known as "management expense ratio" (MER). Depending on the type of fund, operating expenses vary widely. The largest component of operating expenses is the fee paid to a fund's investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. A fund's trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio. Costs associated with mutual funds but not included in operating expenses are loads and redemption fees, which, if they apply, are paid directly by fund investors. FAIR WEATHER FUND A type of mutual fund that has a tendency to perform well during a bull market. In other words, it is a mutual fund that generally outperforms the market when the market is doing well, and underperforms the market when the market is doing poorly. Fair weather funds are very active during bull markets. For example, mutual funds that focused on technology companies in the early stages of the tech bubble in the 1990s were very successful. To determine whether a prospective mutual fund is a fair weather fund, simply compare the fund's relative returns to the market index during both bear and bull markets.

FAMILY OF FUNDS A group of mutual funds offered by one investment or fund company. Each mutual fund has different characteristics and can range depending on investment objective. Also referred to as a "Mutual Fund Family" or simply a "Fund Family". Most fund companies offer a selection of mutual funds for investors to choose from. A large fund family offers investors a number of conveniences: "one-stop" shopping for their fund investing activities, the consolidation fund investments in one monthly statement,

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and the opportunity to make money transfers and undertake fund exchanges within the family easily and, usually, at little or no cost.

FEEDER FUND A fund that conducts virtually all of its investing through another fund (called the master fund). This is similar to a fund-of-funds arrangement, except that the master fund manager is responsible for managing the underlying investments. Often, an onshore feeder fund will invest in an offshore master fund. This is done so that the foreign master fund can gain a tax advantage for the domestic investors.

FINAL PROSPECTUS Because open-end mutual funds are continuously offering shares to the public, a fund prospectus is usually updated annually and made available to the public. Mutual fund prospectuses are all of the "final" variety.

FIXED-INCOME STYLE BOX Created by Morningstar, a fixed-income style box is designed to visually represent the investment characteristics of bonds and bond mutual funds. This is a valuable tool for investors to use to determine the risk-return structures of their bonds/ bond portfolios and/or how these investments fit into their investing criteria. Also referred to as a "bond style box".

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A fixed-income style box is made up of nine squares, with the investment features of bonds/bond mutual funds presented along its vertical and horizontal axes. For bonds and bond funds, the horizontal axis is divided into three maturity categories: short term, intermediate term and long term. The vertical axis is divided into three credit-quality categories: high (AAA - AA), medium (A - BBB) and low (BB - C). A fixed-income investor looking for safety would confine his or her bond or bond fund investments to the investment grade credit quality categories identified as high and medium, combined with the short- to intermediate-term maturity categories. For a risk taker, the category combination of low credit quality and long-term maturity will provide a high-risk, high-yield return.

FLEXI-CAP FUND A type of mutual or hedge fund that is not restricted to investing in any company with a predetermined market capitalization. This type of fund structure will be indicated in the fund's prospectus, and will provide the fund manager with greater investment choices and diversification possibilities.

Unlike other funds, such as mid cap or small cap funds, size is not an issue. Some mutual funds will not invest in companies that are below a certain market cap, which is usually around $100 million. A flexi cap fund may invest in any company regardless of the company's size.

FLEXIBLE FUND A mutual fund or other pooled investment that may change its investment strategy as it sees fit, as opposed to sticking to one particular investment vehicle, company size, or asset allocation. If a fund is flexible in its strategy, this will usually be stated in the prospectus and/or other marketing material.

Peter Lynch ran a flexible fund when he managed the Fidelity Magellan fund in the 1980s and early 1990s. Today, most mutual funds are pegged to a particular "style box", such as large-cap growth or small-cap value, which helps them to reach out to a specific audience of investors. A flexible fund will often state that its main objective is maximizing total return, and will choose the best investments to meet that goal. Many

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investors, however, appreciate knowing a mutual fund's focus because it helps them to diversify investments across several funds. Because of this, many flexible funds operating today are run by experienced, respected money managers who can often market the fund on their names alone. FOCUSED FUND A fund that contains a large holding of a small number of stocks. Also known as "underdiversified fund" or "concentrated fund". There are three general types of focused funds: 1. Those that hold a portfolio concentrated in approximately 10-30 stocks 2. Those that concentrate their holdings within one to three sectors 3. Those that hold a large number of different stocks, but a large portion of the total portfolio value is concentrated in a very small number of stocks. FOREGONE EARNINGS The difference in earnings or performance between what is actually achieved and what could have been achieved with the absence of specific fees, expenses or lost time. Forgone earnings represent the investment capital that the investor spent on investment fees. The assumption is that if the investor had been exposed to lower fees, he or she would have generated a better return. This term is often used when referring to management fees or other expenses paid to mutual funds, exchange-traded funds, or other pooled investment vehicles.

Foregone earnings as they relate to investment performance can be a big drag on the long-term growth of assets. Something as seemingly innocent as a front-end load or a 1% management fee can cost thousands of dollars as the years pile up, thanks to the wonders of compound returns. To limit forgone earnings, it is important to look at the costs associated with each investment. For example, say you have $10,000 to invest and one fund charges 0.5%, while the other fund charges 2%. If you invest in the 2% fund, you will be charged $200, while the 0.5% fund only charges $50. The difference, or $150, is your forgone earnings, which could have been invested instead of being lost to fees.

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FORM 1099-DIV A form sent to investors by investment fund companies. The form is a record of all taxable capital gains and dividends paid to an investor, including those that have been re-invested in a given taxation year. The amounts stated on the form represent the amounts that fund companies are attributing to each investor's investment return for the year and reporting to the IRS. Investors use Form 1099-DIV to help report income received from investments on their tax return each year. Form 1099-DIV reports the ordinary dividends, total capital gains, qualified dividends, non-taxable distributions, federal income tax withheld, foreign tax paid and foreign source income from each investment account held by a fund company. Forms are not sent to investors who received or re-invested a total of less than $10 per fund. FORWARD PRICING A Securities and Exchange Commission regulation that requires that investment companies price all of their buy and sell orders of fund shares according to the next net asset value (NAV). This valuation process is for open-end mutual fund transactions in which the mutual fund itself is constantly issuing and redeeming mutual fund shares at the most recent NAV per share. Forward pricing is implemented when a trade is placed to buy or sell shares of an open-end mutual fund. This occurs because open-end funds only recalculate the net asset value of their mutual fund shares after the market closes each trading day. As a result, any mutual fund order placed by an investor can't be quoted at a previous net asset value price, and must instead be given according to the next computed net asset valuation. FOUL WEATHER FUND A mutual fund that tends to perform well or better than the overall market during weak market conditions. Foul weather funds are created with downward market moves in mind where the goal of the fund is to limit or benefit from the effects of downward moves in the market. While there is no set criteria of what investments a foul weather fund is made up of, they often invest in stocks with lower volatility, such as blue chip stocks, which historically hold up well during a weak market. These funds will also typically look to invest in stocks and other assets that have a strong negative or zero correlation to the stock

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market.

FRONT-END LOAD A commission or sales charge applied at the time of the initial purchase for an investment, usually mutual funds and insurance policies. It is deducted from the investment amount and, as a result, it lowers the size of the investment. Front-end loads are paid to investment intermediaries (financial planners, brokers, investment advisors) as sales commissions. As such, these sales charges are not part of a mutual fund's operating expenses. It is argued that a load is a cost that investors incur for obtaining an investment intermediary's expertise in selecting appropriate funds for clients. It is a matter of record that load funds do not outperform no-load funds. Generally, the sales charge on a load mutual fund will be waived if such a fund is included as an investment option in a retirement plan such as a 401(k). FUND CATEGORY A way of differentiating mutual funds according to their investment objectives and principal investment features. This categorization allows investors to spread their money around in a mix of funds with a variety of risk and return characteristics. With stock funds, the basic categories are defined by the size of the companies in which the fund invests - large-cap, mid-cap and small-cap - and investment style - value, growth and blend (value/growth mix). Specialty stock funds (real estate, healthcare, etc.) and international funds offer additional opportunities. Bond funds are categorized principally by their average portfolio maturities - long, intermediate and short - and credit quality - high, medium and low. Municipal and international funds provide additional bond investment diversification. Hybrid, or asset allocation, funds offer a mix of stock and bond investments and come in two types: conservative and moderate allocation.

FUND COMPANY A commonly used term to describe an investment company, which is a

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corporation or trust engaged in the business of investing the pooled capital of investors in financial securities. This is most often done either through a closed-end fund or an open-end fund (conventional mutual fund). In the U.S., most fund companies are registered and regulated by the Securities and Exchange Commission under the Investment Company Act of 1940. Also known as a "fund sponsor" and an "open-end fund company".

Fund companies are business entities, both privately and publicly owned, that manage, sell and market closed-end and open-end funds to the public. They typically offer a variety of funds and investment services to investors, which include portfolio management, record keeping, custodial, legal, accounting and tax management services.

FUND MANAGER The person(s) resposible for implementing a fund's investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as co-managers and by a team of three or more people. Fund managers are paid a fee for their work, which is a percentage of the fund's average assets under management. Also known as an "investment manager". The individuals involved in fund management (mutual, pension, trust funds or hedge funds) must have a high level of educational and professional credentials and appropriate investment managerial experience to qualify for this position. Investors should look for long-term, consistent fund performance with a fund manager whose tenure with the fund matches its performance time period. The whole point of investing in a fund is to leave the investment management function to the professionals. Therefore, the quality of the fund manager is one of the key factors to consider when analyzing the investment quality of any particular fund. FUND OF FUNDS A mutual fund that invests in other mutual funds. This method is sometimes known as "multi-management." A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund. However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of

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the underlying funds. Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called "Acquired Fund Fees and Expenses" (AFFE). FUND OVERLAP A situation resulting from owning several mutual funds or exchange-traded funds (ETFs) that hold positions in some of the same securities. Fund overlap reduces the benefits of diversification for the investor. While small amounts of overlap are to be expected, extreme cases of fund overlap can expose an investor to high levels of company or sector risk, which can distort portfolio returns when compared with a relevant benchmark. It can be very difficult for a retail investor to keep up fund holdings, but a quarterly or annual check can help investors to understand the strategy of each individual fund, and provide an opportunity to compare top holdings from one fund to another. If, for example, two separate mutual funds both have overweighted the same stock, it might be worth replacing one of the funds with a similar fund that doesn't carry that stock as a top holding. If a specific sector is overweighted in two funds (such as an overweight position in technology relative to the S&P 500), the investor will need to weigh the benefits and risks of this increased exposure.

GILT FUND A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt. Gilts originated in Britain. Gilt funds differ from bond funds because bond funds invest in corporate bonds, government securities, and money market instruments. Gilt funds stick to high quality-low risk debt, mainly government securities.

GLOBAL FUND A type of mutual fund, closed-end fund or exchange-traded fund that

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can invest in companies located anywhere in the world, including the investor's own country. These funds provide more global opportunities for diversification and act as a hedge against inflation and currency risks. Many people confuse a global fund with an international, or foreign, fund. The difference is that a global fund includes the entire world, whereas an international/foreign fund includes the entire world except for companies in the investor's home country. GO-GO FUND A slang name for a mutual fund that has an investment strategy that focuses on high-risk securities in an attempt to capture above average returns. A go-go fund's aggressive approach usually involves holding large positions in growth stocks. Go-go funds entice investors by promising large, abnormal returns created from shifting portfolio weights around speculative information. While investors may experience superior profits, they are also bearing a great deal of risk. These types of mutual funds were highly valued in the 1960s, but became less popular after large downturns in their speculative holdings. GREEN FUND A mutual fund or other investment vehicle that will only invest in companies that are deemed socially conscious in their business dealings or directly promote environmental responsibility. A green fund can come in the form of a focused investment vehicle for companies engaged in environmentally supportive businesses, such as alternative energy, green transport, water and waste management, and sustainable living. A green fund's strategy can be based on avoiding negative company criteria (businesses such as guns, alcohol, gambling, pornography, animal testing, etc.), choosing positive company criteria (environmental programs, energy conservation, fair trade, etc.), or a combination of both strategies. Based on performance, it is not yet clear whether green funds and socially responsible investing can consistently create better returns for investors. But they do represent a proactive step toward environmental consciousness, which many investors appreciate.

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GROWTH FUND A diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. Portfolio companies would mainly consist of companies with above-average growth in earnings that reinvest their earnings into expansion, acquisitions, and/or research and development.

Most growth funds offer higher potential capital appreciation but usually at above-average risk. Growth funds are more volatile than funds in the value and blend categories. The companies in a growth fund portfolio are in an expansion phase and they are not expected to pay dividends. Investing in growth funds requires a tolerance for risk and a holding period with a time horizon of five to 10 years.

HIDDEN LOAD An undisclosed fee or sales charge, which is often hidden in the fine print of a fund's prospectus or in an insurance contract. In some cases, investors and clients do not realize they are paying the hidden load, as explicit attention is never drawn to the issue. A hidden load is a cost that a customer is typically never told about. For example, most investors are unaware of the 12b-1 fee that mutual funds often charge. With this hidden load, the investor will pay an small, annual charge to cover the fund's promotional and advertising expenses.

HIGH WATERMARK The highest peak in value that an investment fund/account has reached. This term is often used in the context of fund manager compensation, which is performance based. The high watermark ensures that the manager does not get paid large sums for poor performance. So if the manager loses money over a period, he or she must get the fund above the high watermark before receiving a performance bonus. For example, say after reaching its peak a fund loses $100,000 in year one, and then makes $250,000 in year two. The manager therefore not only reached the high watermark but exceeded it by $150,000 ($250,000 - $100,000), which is the amount on which the manager gets paid the bonus.

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HUB AND SPOKE STRUCTURE An investment structure in which several investment vehicles, while each remaining individually managed, pool their assets together by contributing to one central investment vehicle. The smaller investment vehicles are referred to as the "spokes" and the central investment vehicle is referred to as the "hub". This is also called a "master-feeder structure". Employing a hub and spoke structure can provide substantial benefits to managers of investment funds or similar investment vehicles. The common key benefit is derived from tax savings created by the structure. U.S. investors who have taxable investments in off-shore investment companies will likely incur tax liabilities due to the offshore fund's (the spoke) classification as a passive foreign investment company (PFIC). However, the central investment fund (the hub) can avoid PFIC status, and when structured as a partnership with the spoke fund, insulate the investor from taxes that would otherwise be incurred on the spoke fund. As well, hub and spoke structures provide economies of scale to their participating investment vehicles, which can further enhance the bottom-line returns for investors.

HYBRID FUND A category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed. Morningstar separates hybrid funds into domestic hybrid and international hybrid categories.

In the hybrid category, balanced funds tend to stick to a relatively fixed allocation of stocks and bonds. Actively managed asset allocation funds tend to have portfolios with a mix of stocks and bonds that responds to market conditions as perceived by the fund manager. Passively managed asset allocation, life-cycle and target-date funds generally have a stock-bond mix that changes over a lifetime, moving progressively from aggressive to more conservative structures.

INCOME FUND A type of mutual fund that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital appreciation. Such funds hold a variety of government, municipal and corporate debt obligations, preferred stock, money market instruments, and dividend-

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paying stocks. Share prices of income funds are not fixed; they tend to fall when interest rates are rising and to increase when interest rates are falling. Generally, the bonds included in the portfolios of these funds are of investment grade. The other securities are of sufficient credit quality to assure a preservation of capital. There are two popular high-risk funds that also focus mainly on income: high-yield bond funds and bank loan funds. The former invests primarily in corporate "junk" bonds and the latter in floating-rate loans issued by banks or other financial institutions.

INCOME SHARE A class of shares offered by a dual purpose fund that has little room for capital appreciation but gives the holder a portion of all income earned in the portfolio. This type of share typically attracts those investors looking for a steady stream of income rather than capital appreciation. The holders receive their portion of all income created in the portfolio plus any additional returns on the stocks' par value at the time of the fund's dissolution. INCOME TRUST An investment trust that holds assets which are income producing. The income is passed on to the unit holders. Some of the most popular income trusts are Real Estate Investment Trusts (REITs) and Natural Resource Trusts. The main attraction of income trusts is their ability to generate constant cash flows for investors. INCUBATED FUND A fund that is offered privately when it is first created. Investors of this type of fund are usually employees associated with the fund and their family members. Incubation allows fund managers to keep a fund's size small while testing different investment styles before the fund is available to the public and subject to rules and regulations. These types of funds are never officially called "incubated," but are instead called "limited distribution" funds.

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There are two paths that can be taken by an incubated fund. If the fund is able to achieve excessive returns it is "born" and made available to the public. However, if returns are not adequate, the fund is liquidated and "buried." The use of incubated funds has come under criticism in recent years. This is because incubated funds are not managed under normal conditions and, therefore, the returns achieved can be greater than normal. When the fund is advertised to the public, it may not be able to replicate the incubated returns it advertises. To avoid problems, investors must be able to identify whether a fund was first an incubated fund. However, this is easier said than done, as fund managers usually attempt to hide a fund's incubator origins. INCUBATION A trial process in which a fund company operates a number of funds privately with its own capital or employee capital, and only opens the top performing funds to the public. The higher performing funds that survive the incubation period are used by the fund company to generate business. The funds with unattractive performance, which would be more difficult to market, are liquidated. See also "incubated fund." While there is nothing illegal about this practice, some consider it to be unethical because it can overstate the investing performance of the fund company, creating what is known as incubation bias. For example, suppose that a fund company starts three funds that earn returns of -5%, 2%, and 20%, respectively, over a one-year period. If the fund company only opens the 20% fund to the public and does not disclose the other performances, a bias is created because the average performance of the three funds is actually 5.7%.

INDEX FUND A type of mutual fund with a portfolio constructed to match or track the components of a market index such as the S&P 500 Index. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. "Indexing" is a passive form of fund management that has been successful in outperforming most actively managed mutual funds. While the most popular index funds track the S&P 500, a number of other indexes, including the Russell 2000 (small companies), the DJ

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Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Lehman Brothers Aggregate Bond Index (total bond market) are widely used for index funds. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500. INDEX HUGGER A managed mutual fund that tends to perform much like a benchmark index such as the S&P 500, which gives it the reputation of being a "closet index fund." The majority of actively managed funds are expected to outperform the so-called average performance produced by passively managed index funds. Also known as a "closet tracker" or "pseudo tracker". Investors pay fund investment managers higher fees to do better than index funds, although managers often fail to outperform the index. A high R-squared factor, a mutual fund risk analysis measure, between 85 and 100 indicates that a managed fund's performance patterns are in line with the fund's benchmark index. If this is the case, investors may be better off investing in the index, which has lower portfolio turnover and lower expense ratio features.

INFORMATION RATIO A measure of portfolio management's performance against risk and return relative to a benchmark or alternative measure. This ratio was developed by Nobel laureate William Sharpe. It is a straightforward way to evaluate the return a fund manager achieves, given the risk they take on. INSTITUTIONAL FUND A mutual fund targeting high value investors with low fees, but high minimum requirements. These funds must indicate within their prospectuses or name that they're institutional and typically solicit managers of retirement plans, institutional investors, and large endowment trusts.

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INSTITUTIONAL SHARES A class of mutual fund shares available for sale to investing institutions, either on a load or no-load basis. With sizable minimum investments, usually around $500,000 or more, funds will typically waive any front-end sales charges on these shares.

Institutions, such as large money managers, often buy a significant number of shares in mutual funds at any one time. Buyers of big blocks of mutual fund shares expect, and often receive, a break on commission charges. Because of the large investments required to receive these breaks, individual investors typically cannot afford these shares.

INTERNATIONAL EQUITY STYLE BOX A visual representation of the principal investment characteristics of foreign stocks and foreign stock funds. The international equity style box is a valuable tool for investors to use to determine the risk-return structures of their international stocks/portfolios and/or how these investments fit into their investing criteria. Also known as an "international stock style box".

An international equity (stock) style box is comprised of nine squares, or categories, with the investment features of stocks/stock mutual funds presented along its vertical and horizontal axes. Whereas Morningstar uses percentages of its stock database to determine large-cap, mid-cap, and small-cap stocks (company size), internationally, dollar market-capitalizations of less than US$1 billion, US$1 billion to US$5 billion and more than US$5 billion are used to classify companies as small, medium and large, respectively.

INTERNATIONAL FUND A mutual fund that can invest in companies located anywhere outside of its investors' country of residence. Also referred to as a "foreign fund". Many people confuse an international fund with a global fund. The difference is that a global fund includes the entire world, while an international fund includes the entire world minus the investors' home country.

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INTERVAL FUND (SCHEME) A fund that combines the features of open-ended and closed-ended schemes, making the fund open for sale or redemption during pre-determined intervals. In other words, this is a mutual fund with redemption features in between those of closed-end and open-end funds. INVESTMENT COMPANY A corporation or trust engaged in the business of investing the pooled capital of shareholders in the financial instruments of other companies. This is most often done either through a closed-end fund or an open-end fund (also referred to as a "mutual fund"). In the U.S., most investment companies are registered with and regulated by the Securities & Exchange Commission under the Investment Company Act of 1940. Also known as "fund company" or "fund sponsor".

Investment companies are business entities, both privately and publicly owned, that manage, sell, and market funds to the public. They typically offer investors a variety of funds and investment services, which include portfolio management, recordkeeping, custodial, legal, accounting and tax management services. INVESTMENT COMPANY ACT OF 1940 Created in 1940 through an act of Congress, this piece of legislation clearly defines the responsibilities and limitations placed upon fund companies that offer investment products to the public. Enforced and regulated by the Securities and Exchange Commission, this act clearly sets out the limits regarding filings, service charges, financial disclosure and fiduciary duties. It is the document that keeps investment companies in check. INVESTMENT COMPANY INSTITUTE (ICI) Founded in 1940, the Investment Company Institute, based in Washington, D.C., is the national trade association of U.S. investment companies, which includes mutual funds, closed-end funds, exchange-traded funds and unit investment trusts. The ICI encourages high ethical standards for all industry participants, advances the interests of its members, promotes public understanding of the fund industry and undertakes statistical studies and research on

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matters related to the fund business. The ICI publishes an annual "Fact Book" in May. It provides a comprehensive review of trends, activities and statistics on mutual funds, exchange-traded funds and closed-end funds.

INVESTMENT GRADE A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds". Investors should note that government bonds, or Treasuries, are not subject to credit quality ratings. These securities are considered to be of the very highest credit quality. In the case of municipal and corporate bond funds, fund company literature, such as the fund prospectus and independent investment research reports will report an "average credit quality" for the fund's portfolio as a whole. Investors should be aware that an agency downgrade of a company's bonds from 'BBB' to 'BB' reclassifies its debt from investment grade to "junk" status with just a one-step drop in quality. The repercussions of such an event can be highly problematic for the issuer and can also adversely affect bond prices for investors. Safety-conscious fund investors should pay attention to a bond fund's portfolio credit quality breakdown.

INVESTMENT STYLE In the context of stock mutual fund investing, refers to using one of three possible approaches -- investing in value stocks, growth stocks, or a blend of value and growth stocks - to create a fund portfolio. Value stocks are perceived to be less risky than growth stocks, which makes the blend investing style a compromise of the two. Investment style, along with company size, is the basic determinant of a fund portfolio's asset allocation and risk-return parameters. Fund investors should look for a high degree of consistency in a fund's investment style. Frequent changes could be an indication of the fund's

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investment manager chasing performance, which surely involves increasing risk. INVESTOR SHARES Mutual fund shares purchased by individual investors as opposed to institutional shareholders. In general, the amount invested in the fund is what distinguishes investors from institutional shareholders. In many cases, a fund will have a minimum investment that must be made to qualify as an institutional shareholder. For example, Vanguard has a shareholder category called Admiral Shares, which requires a minimal investment level of $100,000 in a fund. At this level, a fund shareholder will benefit from a slightly lower expense ratio as well as certain service benefits. If a fund carries a load, it will apply to investor shares, whereas institutional shareholders will generally have this fee reduced or waived completely because of the size of their investment. LARGE CAP (BIG CAP) A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. This is a abbreviation of the the term "large market capitalization". Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share. Large cap companies are the big kahunas of the financial world. Examples include Wal-Mart, Microsoft and General Electric. Keep in mind that the dollar amounts used for the classifications "large cap", mid cap", or "small cap" are only approximations that change over time. Among market participants, their exact definitions can vary. LATE-DAY TRADING An unethical (if not illegal) practice of a hedge fund purchasing and then selling securities (usually shares of a mutual fund) after the close of a trading day, but making the transactions appear as though they occurred before the market close. For mutual funds, net asset value is (NAV) determined at 4pm EST (the market close), and it does not change until the market opens again. Hedge funds involved in late-day trading work out a special relationship

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with a mutual fund that, usually for higher-than-average fees/commissions, allows the hedge fund to buy and sell mutual fund shares after hours but record the trade at 4pm. This practice gives the hedge fund an opportunity to profit when material information affecting the fund is released after the market close. In such cases, because it is stagnant, the NAV may not represent the actual asset value, which won't materialize until the market opens again - at which time late-day traders sell their shares at a profit.

LEVEL LOAD An annual charge deducted from an investor's mutual fund assets to pay for distribution and marketing costs for as long as the investor holds the fund. For the most part, this fee is paid to intermediaries for selling a fund's shares to the retail public. Also known as a "12b-1 fee". Unlike the one-time front-end (Class A shares) or back-end (Class B shares) loads, level loads (Class C shares) are applied annually as a fixed percentage of a mutual fund's average net assets. Also, unlike front-end and back-end sales charges, these 12b-1 fees are included in a fund's operating expenses. While the load percentage doesn't change, if the net asset value of the fund increases through capital appreciation, the dollar value of the load will actually become more expensive and continuously erode the fund's return. Total 12b-1 fees are capped by law at 1%. Generally, this fee will be pegged at 0.25%, which allows funds that don't exceed this percentage to be classified as no-load funds. This bit of magic, as well as the dubious necessity for the 12b-1 in a robust mutual fund environment, has put the justification for continued use of level load under considerable consumer and regulatory scrutiny. LIFECYCLE FUND A special category of balanced, or asset-allocation, mutual fund in which the proportional representation of an asset class in a fund's portfolio is automatically adjusted during the course of the fund's time horizon. The automatic portfolio adjustments run from a position of higher risk to one of lower risk as the investor ages and/or nears retirement. Also referred to as "age-based funds".

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Proponents of life-cycle funds cite the convenience to investors of putting their investing activities on autopilot through the use of just one fund, which is managed for them. On the other hand, critics of these funds say that their "one size fits all" approach is suspect. For investors who don't want to take responsibility for their retirement investing, a life-cycle fund may be appropriate. However, for those who want to take the time and make the effort to direct the management of their investments, life-cycle funds should be avoided. LIFESTYLE FUND An investment fund featuring an asset mix determined by the level of risk and return that is appropriate for an individual investor. Factors that determine this mix include an investor's age, level of risk aversion, the investment's purpose and the length of time until the principal will be withdrawn. Lifestyle funds can feature conservative, moderate or aggressive growth strategies. Aggressive growth lifestyle funds are targeted to investors in their late 20s, while conservative growth lifestyle funds are targeted to investors in their late 50s. Lifestyle funds are designed to be the main investment in a person's portfolio. The purpose of a lifestyle fund may be defeated if other funds are chosen at the same time because the asset allocation ratio will become distorted. LIPPER INDEXES A series of indexes that tracks the financial performance of different types of mutual funds. Lipper, which is owned by Reuters, allows investors to benchmark the performance of a mutual fund investment against an index of thirty funds that also belong in that investment category.

Lipper creates indexes for each major investment style, such as small- or large-cap funds, value funds and growth funds. Much like the S&P 500 allows stock investors to compare their returns to a market benchmark, a Lipper index aggregates the 30 biggest funds of a given investment style. For example, an investor could compare the performance of a small-cap mutual fund against the Lipper Small-Cap Index, which would combine the 30 biggest small-cap funds, based on asset size.

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LOAD A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund. The fee may be a one-time charge at the time the investor buys into the mutual fund (front-end load), when the investor redeems the mutual fund shares (back-end load), or on an annual basis as a 12b-1 fee. A large number of mutual funds carry sales charges. These are paid directly by the investor in the case of the front-end and back-end variety, and indirectly through a deduction to the net assets of the investor's fund if of the 12b-1, or level-load, variety. Oftentimes, these sales charges will be waived if a load mutual fund is included as an investment option in an employer-sponsored retirement plan. Unlike 12b-1 fees, front-end and back-end loads are not included in the calculation of a fund's operating expenses. LOAD FUND A mutual fund that comes with a sales charge or commission. The fund investor pays the load, which goes to compensate a sales intermediary (broker, financial planner, investment advisor, etc.) for his or her time and expertise in selecting an appropriate fund for the investor. The load is paid up front at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor (level-load). If a fund limits its level load to no more that 0.25% (the maximum is 1%), it can call itself a "no-load" fund in its marketing literature. Front-end and back-end loads are not part of a mutual fund's operating expenses, but level-loads, called 12b-1 fees, are included. The record shows that the performance of load and no-load funds is similar. LOAD WAIVED FUND A share class of a mutual fund that does not require its investors to pay fees (such as front-end loads). Owning shares in a load-waived fund is a benefit to investors because it allows them to retain all of their investment's return instead of losing a portion of it to fees. In most cases, mutual fund companies will limit the number of load-waived funds available to only certain investors.

For example, the purchase of load-waived funds is sometimes

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restricted to those involved in defined contribution retirement plans and also for investors that invest a substantial amount in the mutual fund company's funds (such as institutional investors). These special mutual fund shares commonly have an "LW" at the end of the fund's name and ticker in order to differentiate them. LONG/SHORT FUND A type of mutual fund that mimics some of the trading strategies typically employed by a hedge fund. Unlike most mutual funds, long/short funds use leverage, derivatives and short positions in an attempt to maximize total returns, regardless of market conditions. The amount of leverage used and the number of derivatives and short positions that long/short funds may contain are limited by law. These funds invest primarily in stocks. Long/short funds are the mutual fund industry's attempt to bring some of the advantages of a hedge fund to the common investor. Most long/short funds feature higher liquidity than hedge funds, no lock-in period and lower fees. However, they still have higher fees and less liquidity than most mutual funds. Furthermore, unlike most mutual funds, long/short funds usually require a minimum investment of more than $1,000, although some do not. Long/short funds aren't allowed to use as many derivative and short positions nor as much leverage as hedge funds, but they do provide some diversification to the average investor in down markets. MANAGED ACCOUNT An investment account that is owned by an individual investor and looked after by a hired professional money manager. In contrast to mutual funds (which are professionally managed on behalf of many mutual-fund holders), managed accounts are personalized investment portfolios tailored to the specific needs of the account holder. For example, if an investor buys ABC Mutual Funds, which invests in Company 1 and Company 2, and that investor wants to reduce the weighting of Company 1 in the fund, the fund company wouldn't allow it since the money manager looking after the fund cannot make investment decisions based on one investor's preferences. On the other hand, with managed accounts, investors are given the freedom and ability to do what they want with the investments within the portfolio, and any decision made by the money manager is based on the individual investor's goals and objectives. Thus, if an investor holds

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a managed account and wants to reduce holdings in Company 1, he or she could do so. MANAGED MONEY A means of investment where the investor, rather than buying and selling their own securities, places their investment funds in the hands of a qualified investment professional for a predetermined annual fee.

Mutual funds are a good example of managed money; investors simply put their money into the fund, which deducts a specified percentage from the funds on a periodic basis for the service of researching prospective investments and maintaining the fund's portfolio. Essentially, investors with managed money believe they can earn higher returns by employing someone else to professionally handle their investments.

MANAGEMENT FEE A charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise. It can also include other items such as investor relations expenses and the administration costs of the fund. The management fee is the cost of having your assets professionally managed. The fee pays other people to select which securities your money (along with that of the other investors in the fund) is invested into, to do all the paperwork needed and to provide information about the fund's holdings and performance. Management fee structures vary from fund to fund, but they are typically based on a percentage of assets under management. For example, a mutual fund's management fee could be stated as 0.5% of assets under management. MANAGEMENT RISK The risks associated with ineffective, destructive or underperforming management, which hurts shareholders and the company or fund being managed. This term refers to the risk of the situation in which the company and shareholders would have been better off without the choices made by management. Management risk refers to the chance that company managers will put their own interests ahead of the interest of the company and

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shareholders. An example of this is the recent scandals with Enron, Worldcom and other large companies, whose managers acted in a manner that eventually bankrupted the companies and destroyed shareholder wealth. Management risk also applies to investment managers, whose decisions and actions may divert from the investors' wishes or reduce the value of an investment portfolio. MANAGEMENT TENURE The length of time that a manager(s) has been at the helm of a mutual fund. A long-term fund performance record, preferably of five to 10 years, is a key indicator of a fund manager's investing abilities. Mutual fund investors are best served by investment managers who have proved themselves over an extended period of time. The more closely matched a manager's tenure is with a solid fund performance record, the better. For example, let's compare two different funds: The XYZ Fund has an annualized average 10-year total return of 11% and has been run by the same manager over that period. The ABC Fund has the same 10-year annualized average total return of 11%, but it has had two different managers. One's tenure covered the first nine years and the second has only been on the job for one year. Will the second manager be just as good as the first? We hope so, but making a decision on current managerial quality is difficult because fund performance and managerial tenure don't match. For obvious reasons, mutual funds under team management or index funds are not subject to questions concerning manager tenure. MANAGER OF MANAGERS - MOM A class of financial intermediary that hires professional investment managers to oversee aspects of a client's investment fund. More specifically, the MOM tracks the performance of each investment manager and has the power to fire ineffective managers and then hire replacements on a client's behalf. Using a MOM to handle investments funds is an alternative to hiring a single investment portfolio manager that makes all the asset management decisions. For example, suppose that a teacher's union hires a MOM to invest its pension fund. The MOM then hires a number of investment managers (such as a bond expert, a money market expert and a large-cap stock expert); each has the responsibility of managing the particular asset class in which he or she specializes.

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Because no single manager is an expert at investing in all asset classes, using a MOM allows clients to have an expert asset manager working on each aspect of an investment at all times. MANAGER UNIVERSE (BENCHMARK) The comparison of an account's performance to that of a representative peer group of money managers. This is used when analyzing the performance of a money manager. In addition to being compared to a standardized index such as the S&P 500, the performance of a manager is compared to the performance of others who look over similar accounts in terms of asset class, style, etc. The peer group is referred to as the money manager's universe. MARKET NEUTRAL A strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors, and so on. There is no single accepted method of employing a market-neutral strategy. Managers who hold a market-neutral position are able to exploit any momentum in the market. Hedge funds commonly take a market-neutral position because they are focused on absolute as opposed to relative returns. A market-neutral position may involve taking a 50% long, 50% short position in a particular industry, such as oil and gas, or taking the same position in the broader market. MASTER FUND In general, an investment vehicle that enables individual investors to invest money into one or more underlying investments that are operated by professional managers. Master funds can generally be categorized into three types: discretionary funds, fund of funds, or feeder funds. With this last

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type, shares would be sold to the public only by the feeder fund, but invested through the corresponding master fund. MID CAP FUND A type of stock fund that invests in mid-sized companies. A company's size is determined by its market capitalization, with mid-sized firms generally ranging from $2 billion to $10 billion in market cap. Most stocks held in a mid-cap fund are firms with established businesses that are still considered developing companies. These funds tend to offer more growth than large-cap stocks and less volatility than the small-cap segment. The size restrictions for a mid-cap stock fluctuates between funds. The range of $2 billion to $10 billion is only an approximation, and it can change over time. MINIMUM INVESTMENT The smallest dollar or share quantity that an investor can purchase when investing in a specific security or fund. Most often seen in relation to mutual funds, minimum investments are also found consistently in fixed-income securities hedge funds, collateralized mortgage obligations and limited partnerships where $1,000 units is typically the smallest cut allowed. Minimum investment amounts for mutual funds can stretch anywhere from $0 all the way to $1 million or more for institutional share classes. Hedge fund minimum investments can be even larger, as can some limited partnerships and unit investment trusts. For retail investors, there remains a large selection of funds that have modest minimum investments of a few hundred dollars. A big factor for a fund manager in determining a minimum investment size is the strategy and liquidity demands of the fund itself. By setting a high minimum investment, fund managers can effectively weed out short-term investors and regulate cash inflows to the fund, which can be helpful for day-to-day management of the assets. MIRROR FUND A type of mutual fund, typically run by a life insurance company, that enables an investor to access another company's mutual fund through his or her life insurance policies.

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For example, you might be able to invest in a Fidelity mutual fund through your life insurance policy with Royal & SunAlliance. These types of funds usually involve extra fees/charges. MODIFIED DIETZ METHOD A method of evaluating a portfolio's return based upon a time weighted analysis. The Modified Dietz Method is more accurate way to measure the return on your portfolio than a simple geometric return method. This is because the Modified Dietz Method identifies and accounts for the timing of all random cash flows while a simple geometric return does not. MOMENTUM FUND Investment funds that invest in companies based on current trends in such things as earnings or price movement. The portfolio manager will look for companies that have been trending in a certain direction (e.g. a series of extremely positive earnings releases or upward price momentum in the short term). The manager will then take positions in the same direction as the trend and attempt to ride the wave and sell once it has peaked. These funds are also known as "momo funds". This type of fund, which was very popular in the late 1990s, will often make investments in companies that have grown their earnings or sales at a rapid pace, looking for further increases in the near future. Momentum funds also invest based on technical indicators such as price breakouts from historic levels. The investment premise of this type of fund has often been questioned by the more long-term, value oriented segments of the market, as it is considered difficult to predict short-term price movement. MONEY MARKET FUND An investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. A money market fund's purpose is to provide investors with a safe place to invest easily accessible cash-equivalent assets

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characterized as a low-risk, low-return investment. Because of their relatively low returns, investors, such as those participating in employer-sponsored retirement plans, might not want to use money market funds as a long-term investment option. MORGAN STANLEY CAPITAL INTERNATIONAL - MSCI A leading provider of equity, fixed-income and hedge fund indexes. MSCI has been providing global equity indexes for more than 30 years. In 2003, it launched a new family of U.S. equity indexes. Morgan Stanley's global equity benchmarks have become the most widely used international indexes by institutional investors across 23 developed and 27 emerging markets. This consistent approach makes it possible to aggregate individual indexes to create meaningful composite, regional, sector and industry benchmarks. For example, MSCI's EAFE Index, which is comprised of 21 major indexes from Europe, Australasia and the Far East serves as the most frequently cited benchmark for the performance of a representative total international stock market. MORNINGSTAR RISK RATING A rating system that measures how often a fund loses money compared to the risk-free rate of return (T-bill return). A rating of 1 is considered average for each class of funds. So, if a mutual fund's risk rating is 1.25, then it is 25% more risky than the other funds in its class. MULTI-ADVISOR FUND An investment fund that is managed by more than one investment manager, each with a particular specialty. The goal of the multi-advisor fund is to make investment decisions based on multiple professional opinions, rather than relying on a single person to have comprehensive knowledge of investment options. The multi-advisor fund tends to have a very specific international focus; for example, a fund may invest in high-grade South American debt and Asian equities, with one manager responsible for South American debt and a team responsible for the Asian equities component. As investment options become more complex, multi-advisor funds become increasingly necessary to fully understand the markets and businesses

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in which we invest. "Multi-advisor fund" is most commonly used to describe a type of hedge fund. MULTI-DISCIPLINE ACCOUNT A type of investment account that allows access by several specialized investment managers within one main account. The account is split into several sub-accounts that are separately run by managers with relevant expertise. The multi-discipline account provides investors with an efficient way to get professional investment management and asset diversification. It is also referred to as a "multi-style" and "multi-strategy account". These type of investment accounts were created as an alternative to separately managed accounts that have only one type of management expertise and make it more difficult to diversify. Generally the minimum amount needed to invest in a separately managed account is around $100,000 while the minimum for a multi-discipline account is $150,000. So, with the separately managed account, if an investor wanted to split assets into 60% equity and 40% fixed income, he or she would need to open two separately managed accounts and would need at minimum $200,000. With the multi-discipline account, however, the investor needs only to open the one account, requiring only a total of $150,000, and separate the assets into two sub-accounts. MUNICIPAL BOND FUND A mutual fund that invests in municipal bonds, or "munis." Municipal bonds are debt securities issued by a state, municipality, county, or special purpose district (public schools, airports, etc.) to finance capital expenditures. They are exempt from federal tax, and are generally exempt from state taxes for residents of the state in which they are issued. Municipal bonds and bond funds are generally bought for their favorable tax implications and are a popular fixed-income investment for people in a high income tax bracket. Like all bonds, the municipal variety is subject to an investor's consideration of yield, credit quality and duration.

MUTUAL FUND An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual

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funds are operated by money mangers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS. MUTUAL FUND CASH LEVEL The percentage of a mutual fund's total assets that are currently held in cash or cash equivalents. While mutual fund cash level can refer to the cash level of an individual fund, it most often refers to the aggregate level of cash held across a wide demographic of mutual funds, which is used as a barometer of institutional buying power and market sentiment. Most mutual funds need to keep around 5% cash available at all times in order to handle the day-to-day redemptions of shares. Cash levels outside of this range can signal a collective sense of fear or optimism about the broad markets. For instance, if aggregate mutual fund cash levels are above 10%, this would signal that fund managers are generally bearish about the market and holding back on making new purchases. On the other hand, cash levels in the range of 5-8% would signal a generally bullish stance, as most available cash is being put to work in the market. Some investors view mutual fund cash levels as a contrarian indicator, as cash levels generally reach their peak at market bottoms. MUTUAL FUND CUSTODIAN A trust company, bank or similar financial institution responsible for holding and safeguarding the securities owned within a mutual fund. A mutual fund's custodian may also act as the mutual fund's transfer agent, maintaining records of shareholder transactions and balances. Also referred to as a "mutual fund corporation". Since a mutual fund is essentially a large pool of funds from many

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different investors, it requires a third-party custodian to hold and safeguard the securities that are mutually owned by all the fund's investors. This structure mitigates the risk of dishonest activity by separating the fund managers from the physical securities and investor records. MUTUAL FUND LIQUIDITY RATIO A ratio published monthly by the Investment Company Institute that compares the amount of cash relative to total assets held by a mutual fund. Equity investors use the mutual fund liquidity ratio to gauge the demand for shares and the bullishness or bearishness of portfolio managers. For example, if a mutual fund is sitting on a large amount of cash, the theory is that it is doing so because it is hard pressed to find quality investment opportunities; therefore, it has a bearish sentiment towards the market. Conversely, if a mutual fund is highly invested and has a very small amount of cash on hand, the theory is that it has found some excellent investing opportunities and is taking advantage of these opportunities by being nearly fully invested - that is to say, it is bullish.

MUTUAL FUND SUBADVISOR A money manager who works outside of the fund, and is hired by a fund manager to help with an investment portfolio. These subadvisors are allowed to manage all or some of a fund's assets, and usually are given a set of investment objectives to adhere to when selecting securities.

Mutual fund subadvisors usually head teams of smaller, more specialized investment firms. They are hired because of their expertise using specific securities in various industries. For fund managers, the benefit of using subadvisors is that they allow funds to tap talent that is not available in-house. Investors should be aware of the fees the fund must pay to subadvisors. These fees could be charged to shareholders over and above any fees that already exist. These fees may take away value from a shareholder's investment.

MUTUAL FUND TIMING A legal but frowned-upon practice whereby traders attempt to profit

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from the short-term differences between the daily closing prices of a mutual fund. Don't confuse market timing with mutual fund timing. Market timing is a very acceptable practice of trying to predict the best time to buy and sell stocks Mutual fund timing has a negative effect on a fund's long-term investors, as they will be subjected to higher fees due to the transaction costs of the short-term trading. In order to prevent this practice, most mutual funds impose a stiff short-term trading penalty, known as a redemption fee, upon the sale of funds that are not held for a minimum period of time, which generally ranges from 90 days to one year. In September of 2003, some mutual fund companies were investigated for permitting Hedge Funds to "time" mutual funds purchases. These hedge funds paid the mutual fund companies money for the right to buy and sell funds on a short-term basis without any short-term penalties. MUTUAL-FUND ADVISORY PROGRAM A portfolio of mutual funds that are selected to match a pre-set asset allocation model based on the investor's objectives and offered in a single investment account together with the services of a professional investment advisor. Typically, investors won't be charged separate transaction fees, but periodic (i.e. monthly/quarterly/yearly) asset-management fees based on the average value of assets held within the account. Also known as a "mutual fund wrap". Unlike managed accounts where the financial advisor has full discretion over any investment decisions, mutual-fund advisory programs allow the investor to work with the advisor in developing the optimal asset-allocation strategy. The advisor will help determine which model is best based on various factors such as the investor's goals, risk tolerance, time horizon and income, while providing ongoing guidance and investment support. NAV RETURN The change in the net asset value of an exchange-traded fund (ETF) or mutual fund over a given time period. The NAV return of an ETF or mutual fund can be different than the total return that investors realize because these products can trade at a premium or discount to the price of the fund and to the value of the assets held in the portfolio.

Many investors will monitor the NAV return instead of total return. It is a better measure of comparing the relative performance of several

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funds because it ignores the market forces that can cause some funds to trade at a premium or discount to their net asset values.

NET ASSET VALUE - NAV A mutual fund's price per share or exchange-traded fund's per-share value. In both cases, the per-share dollar amount of the fund is derived by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. In the context of mutual funds, net asset value per share is computed once a day based on the closing market prices of the securities in the fund's portfolio. All mutual fund buy and sell orders are processed at the NAV of the trade date; however, investors must wait until the following day to get the trade price. Mutual funds pay out (distribute) virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return. Because exchange-traded funds and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount) net asset value. NET ASSET VALUE PER SHARE - NAVPS An expression for net asset value that represents a fund's (mutual, exchange-traded, and closed-end) or a company's value per share. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding. Also referred to as "book value per share". Calculated as:

NAVPS is the value of a single unit, or share, of a fund. This figure for a mutual fund is the price at which shares are bought and sold. Because exchange-traded and closed-end funds are listed and traded as stocks, which are subject to market forces, their NAVPS and buying/selling prices per share can be divergent.

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In the context of corporate financial statements of publicly traded companies, the NAVPS, more commonly referred to as book value per share, is usually below the market price per share. The historical cost accounting principle, which tends to understate certain asset values, and the supply and demand forces of the marketplace generally push stock prices above book value per share valuations. NEW FUND OFFER - NFO A security offering in which investors may purchase units of a closed-end mutual fund. A new fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities. A new fund offer is similar to an initial public offering. Both represent attempts to raise capital to further operations. New fund offers are often accompanied by aggressive marketing campaigns, created to entice investors to purchase units in the fund. However, unlike an initial public offering (IPO), the price paid for shares or units is often close to a fair value. This is because the net asset value of the mutual fund typically prevails. Because the future is less certain for companies engaging in an IPO, investors have a better chance to purchase undervalued shares.

NO-TRANSACTION FEE MUTUAL FUND A mutual fund that is offered to investors by a brokerage firm without any form of commission charged for the transaction. This structure is advantageous to the investor because it allows him or her to purchase the mutual fund without incurring an up-front commission fee on the trade. For investors with a small amount of investment capital, this can be a significant advantage. Also referred to as an "NTF mutual fund". Brokers are usually able to offer NTF mutual funds to their clients because the mutual fund companies that run the funds step in and compensate the brokers for their forgone commission fees. The typical arrangement is that the mutual fund company pays the brokerage firm marketing fees when an investor buys into the fund through a broker, instead of buying directly from the fund. NO-LOAD FUND A mutual fund in which shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party. This is the opposite of a load fund, which charges a commission at the

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time of the fund's purchase, at the time of its sale, or as a "level-load" for as long as the investor holds the fund. Because there is no transaction cost to purchase a no-load fund, all of the money invested is working for the investor. For example, if you purchase $10,000 worth of a no-load mutual fund, all $10,000 will be invested into the fund. On the other hand, if you buy a load fund that charges a front-end load (sales commission) of 5%, the amount actually invested in the fund is only $9,500. If the load is back-ended, when shares of the fund are sold, the $500 sales commission comes out of the proceeds. If the level-load (12b-1 fee) is 1%, your fund balance will be charged $100 annually for as long as you own the fund. The justification for a load fund is that investors are compensating a sales intermediary (broker, financial planner, investment advisor, etc.) for his or her time and expertise in selecting an appropriate fund. It should be noted that research shows that load funds don't outperform no-load funds. NON-CAPPED FUND A mutual fund with no limit on the annual operating expenses charged to shareholders. In a non-capped fund, the charges will always cover the cost of doing business, as no ceiling has been placed on the fees. Investors in non-capped funds do not have the luxury of knowing the maximum amount of fees chargeable by the fund. Since the expenses have no limits, investors are exposed to the risk of high fees, which would diminish their investment returns. The operating expenses of a mutual fund are expressed as a percentage of the total annual fees divided by the fund's average assets. Non-capped fund expenses are based on the before-reimbursement expense ratio, which includes both direct and indirect fees. NONTAXABLE DIVIDENDS Dividends from a mutual fund or some other regulated investment company that are not taxed. Taxes are not paid out because the fund invests in municipal and other tax exempt investments. The mutual fund must invest over 50% of its capital into tax exempt investments for the dividends to be classified as nontaxable.

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NOVA/URSA RATIO A sentiment indicator based on the Nova and Ursa funds from the Rydex Fund Group. The Nova fund is bullish with a target beta of 1.5. Whereas, the Ursa fund is bearish with a target beta of -1.0. This ratio can be used as a proxy for the direction of market sentiment. More specifically, a high value represents a bullish sentiment and a low value represents a bearish sentiment. Calculated as:

For example, A beta of 1.5 means that Nova has a target of 150% of the S&P 500 Index. Ursa's -1.0 means it has a target performance inverse to the S&P 500 Index. That is, if the S&P 500 is down 10%, Ursa should be up 10%. Rather than just measuring someone's opinion about market direction, this ratio shows where people actually are putting their money. OFFSHORE MUTUAL FUND A mutual fund that is based in an offshore jurisdiction, which is generally considered to be outside the United States. The term is often used, perhaps incorrectly, to describe a fund that is not in a high-tax country. Always be careful when investing your money in offshore accounts that have sponsors that are not well known and/or are located outside of established financial centers such as London or Hong Kong. Non-mainstream offerings may be more prone to scams because of relaxed regulations in some offshore locations. Offshore funds offer a number of features that distinguish them from those domiciled in the U.S., as a lower level of regulation makes it easier to establish and administer the funds. Consequently, operating costs are significantly reduced and management fees can be lower. Tax exempt status enables the fund to reinvest gains that would otherwise be taxable in high-tax areas. OPEN ENDED INVESTMENT COMPANY - OEIC A type of company or fund in the UK that is structured to invest in other companies with the ability to adjust constantly its investment criteria

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and fund size. The company's shares are listed on the London Stock Exchange, and the price of the shares are based largely on the underlying assets of the fund. There are no bid and ask quotes on the OEIC shares; buyers and sellers receive the same price. These are open ended, which means that they can adjust the amount of shares in the fund by either issuing or eliminating shares. When shares are issued, the fund receives money and invests it. When eliminating shares, the fund pays out money from the fund. These funds can mix different types of investment strategies such as income and growth, and small cap and large cap. OPEN-END FUND A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. The majority of mutual funds are open-end. By continuously selling and buying back fund shares, these funds provide investors with a very useful and convenient investing vehicle. It should be noted that when a fund's investment manager(s) determine that a fund's total assets have become too large to effectively execute its stated objective, the fund will be closed to new investors and in extreme cases, be closed to new investment by existing fund investors. OPEN-END MANAGEMENT COMPANY A company that distributes and redeems securities it issues. The most common open-end management companies are mutual fund companies which sell and redeem shares at the net asset value per share.

This is just a fancy legal name for a mutual fund. An investor in an open-end fund essentially pools his/her money with other investors in order to attain economies of scale, professional management, etc. This differs from a closed-end fund which has a limited number of shares available. Unlike with open-end funds, an investor in a closed-end fund typically sells his/her shares on the open market to another investor instead of back to the fund company.

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OVERWEIGHT 1. A situation where a portfolio holds an excess amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so will allow the portfolio to achieve excess returns. Securities will usually be overweight when a portfolio manager believes that the security will outperform other securities in the portfolio. An example of overweighting a security would be when a portfolio normally holds a security at a weight of 15%, and the security's weight is raised to 25% in an attempt to increase the returns of the portfolio. 2. An analyst's opinion regarding the future performance of a security. Overweight will usually signify that the security is expected to outperform either its industry, sector or, even, the market altogether. An example of an analyst's rating of overweight would be: The stock's return is expected to be above the average return of the overall industry over the next eight to 12 months. Specific analyst definitions vary regarding the time frame used and the benchmark the security is compared against. PASSIVE MANAGEMENT A style of management associated with mutual and exchange-traded funds where a fund's portfolio mirrors a market index. Passive management is the opposite of active management in which a fund's manager(s) attempt to beat the market with various investing strategies and buying/selling decisions of a portfolio's securities. Also known as "passive strategy," "passive investing" or "index investing." Followers of passive management believe in the efficient market hypothesis. It states that at all times markets incorporate and reflect all information, rendering individual stock picking futile. As a result, the best investing strategy is to invest in index funds, which, historically, have outperformed the majority of actively managed funds. PERFORMANCE BASED COMPENSATION An incentive-based form of compensation that is reserved for hedge fund managers or elite portfolio managers. The compensation will almost always be based on a percentage of total assets managed, and will be paid out if the portfolio manager delivers returns above a pre-

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specified level, such as performance in relation to the S&P 500. Many hedge fund managers are paid 20% of client profits if their investment returns are over a predetermined benchmark. Under this form of compensation, talented hedge fund managers that manage large funds can easily earn tens of millions of dollars (if not more). PIPELINE An investment company whose purpose is to collect investment funds from a pool of individual investors and invest them in financial securities. Such firms are usually exempt from normal corporate taxes, since they simply serve as an investment conduit, or pipeline, rather than actually producing goods and services as a regular corporation does. A mutual fund structured as a trust would be exempt from corporate taxes and considered an investment pipeline. PIPELINE THEORY 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. Also referred to as "conduit theory". Basically the investment 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. POOLED FUNDS Funds from many individual investors that are aggregated for the purposes of investment, as in the case of a mutual or pension fund. Investors in pooled fund investments benefit from economies of scale, which allow for lower trading costs per dollar of investment, diversification and professional money management. The enormous advantages of investing in pooled fund vehicles make them an ideal asset for many investors. There are added costs involved in the form of management fees, but these fees have been steadily declining for many years as competition has increased. The main detractor of pooled fund investments is that capital gains are spread evenly among all investors - sometimes at the expense of new

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shareholders. PORTFOLIO A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals. Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives. Think of an investment portfolio as a pie that is divided into into pieces of varying sizes representing a variety of asset classes and/or types of investments to accomplish an appropriate risk-return portfolio allocation. For example, a conservative investor might favor a portfolio with large cap value stocks, broad-based market index funds, investment-grade bonds and a position in liquid, high-grade cash equivalents. In contrast, a risk loving investor might add some small cap growth stocks to an aggressive, large cap growth stock position, assume some high-yield bond exposure, and look to real estate, international, and alternative investment opportunities for his or her portfolio. PORTFOLIO INCOME Income from investments, including dividends, interest, royalties, and capital gains. There are three main categories of income: active income, passive income, and portfolio income. These categories of income are important because losses in passive income generally cannot be offset against active or portfolio income. PORTFOLIO MANAGEMENT The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance. Portfolio management is all about strengths, weaknesses, opportunities, and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

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In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed. PORTFOLIO MANAGER The person responsible for investing a mutual fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading. The portfolio manager is one of the most important factors to consider when looking at fund investing. Portfolio management can be active or passive (index tracking). Historical performance records indicate that only a minority of active fund managers beat the market indexes. PORTFOLIO PUMPING The illegal act of bidding up the value of a fund's holdings right before the end of a quarter, when the fund's performance is measured. This is done by placing a large number of orders on existing holdings, which drives up the value of the fund. Also known as 'marking the close'. Portfolio pumping can be highly destructive for investors in the fund because it is a temporary gain and the stocks will generally fall back to previous levels once the price manipulation is over. For example, if a fund has 1,000 shares of ABC purchased for $10 per share, if the shares are trading at $9 right before the managers’ performance is measured, they will have performed poorly. As a result, the managers may resort to portfolio pumping and place enough orders to bid the price to $14, dramatically increasing the fund’s performance. However, it is likely that the shares will fall back towards $9, leaving investors with a $9 stock that was made to look like a $14 stock. PORTFOLIO TURNOVER A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total

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net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period. The portfolio turnover measurement should be considered by an investor before deciding to purchase a given mutual fund or similar financial instrument. After all, a firm with a high turnover rate will incur more transaction costs than a fund with a lower rate. Unless the superior asset selection renders benefits that offset the added transaction costs they cause, a less active trading posture may generate higher fund returns. In addition, cost conscious fund investors should take note that the transactional brokerage fee costs are not included in the calculation of a fund's operating expense ratio and thus represent what can be, in high-turnover portfolios, a significant additional expense that reduces investment return. PREMIUM TO NET ASSET VALUE A pricing situation that occurs when the stock value of a closed-end mutual fund is trading at a premium to the net asset value (NAV) of its components. The premium arises from the optimistic sentiment of investors toward the fund, which may be due to excellent management and investment strategies. Only closed-end funds can trade at premiums or discounts to their net asset values. Open-end mutual funds are not affected by supply and demand because they are purchased and sold at their current NAVs. Because premiums are fueled by investor opinions, popular funds with successful past performances will be favorably valued. Similarly, new closed-end funds can often begin trading at a premium due to market optimism and hype. The premium represents the market's belief that the fund managers' continual ability to produce excess returns is a result of their superior market timing and stock selections. PRIVATE INVESTMENT IN PUBLIC EQUITY - PIPE A private investment firm's, mutual fund's or other qualified investors' purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPEs - traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued at a set price to raise capital for the issuer. A structured PIPE, on the other hand, issues convertible debt (common or preferred shares).

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This financing technique is popular due to the relative efficiency in time and cost of PIPEs, compared to more traditional forms of financing such as secondary offerings. In a PIPE offering there are less regulatory issues with the SEC and there is also no need for an expensive roadshow, lowering both the costs and time it takes to receive capital. PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing. PROSPECTUS A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision. Also known as an "offer document". There are two types of prospectuses for stocks and bonds: preliminary and final. The preliminary prospectus is the first offering document provided by a securities issuer and includes most of the details of the business and transaction in question. Some lettering on the front cover is printed in red, which results in the use of the nickname "red herring" for this document. The final prospectus is printed after the deal has been made effective and can be offered for sale, and supersedes the preliminary prospectus. It contains finalized background information including such details as the exact number of shares/certificates issued and the precise offering price. In the case of mutual funds, which, apart from their initial share offering, continuously offer shares for sale to the public, the prospectus used is a final prospectus. A fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management. PROTECTED FUND A type of mutual fund that guarantees an investor at least the initial investment, plus any capital gains, if it is held for the contractual term. The idea behind this type of fund is that you will be exposed to market returns because the fund is able to invest in the stock market, but you will have the safety of the guaranteed principal.

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The initial investment is protected by an insurance policy in case the fund is unable to pay the investor back his or her principal. The initial investment can only be paid back after the guarantee period is over; if the investor sells before this period, he/she is subject to the current value of the fund and any losses that may arise. This type of fund tends to have higher expense ratios than other types of mutual funds. While protected funds state that you will be guaranteed at least your original investment in addition to being exposed to market returns, these funds are often heavily invested in fixed-income securities and have less weighting in the stock market. QUANT FUND An investment fund that selects securities based on quantitative analysis. In such funds, the managers build computer-based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model.

If computers can beat world champion chess players, shouldn't they be able to beat the traders on Wall Street? That's the thinking behind quant funds, whose name comes from the term "quantitative analysis". The advantage is that computers aren't swayed by emotion, and they obviously react much faster than a person ever could. The problem is that humans have to program those computers, and even computers can make mistakes when they are programmed incorrectly. Remember the saying "garbage in, garbage out". To take advantage of the power of computers, you still have to figure out a superior investment strategy. The term "quantitative fund" also doesn't tell you anything about the actual investment strategy being used. Any study of a company or an industry based on quantitative data can be considered a quant strategy. R-SQUARED A statistical measure that represents the percentage of a fund's or security's movements that are explained by movements in a benchmark index. For fixed-income securities the benchmark is the T-bill, and for equities the benchmark is the S&P 500. R-squared values range from 0 to 100. An R-squared of 100 means

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that all movements of a security are completely explained by movements in the index. A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100, yet has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta. RECLASSIFICATION The process of changing the class of mutual funds once certain requirements have been met. These requirements are generally placed on load mutual funds. Reclassification is not considered to be a taxable event. Sometimes mutual fund companies will decide to issue more than one series of similar mutual funds. Each series has different features and durations, and when the restrictions expire, they become reclassified to the fund with no restrictions. Suppose that a company issues 2 mutual funds. Fund A is a no load fund, while fund B is a 5 year back-end load fund. After 5 years, when there is no longer a load structure, fund B will then be reclassified to fund A. REDEMPTION The return of an investor's principal in a security, such as a stock, bond, or mutual fund. Redemption of mutual fund shares from a mutual fund company must occur within seven days of receiving a request for redemption from the investor.

REDEMPTION FEE A fee collected by an investment company from traders practicing mutual fund timing. This stiff penalty is used to discourage short-term, in-and-out trading of mutual fund shares. Generally, the fee is in effect for a holding period from 30 days to one year, but it can be in place for longer periods. Also referred to as an "exit fee", "back-end load" or "contingent deferred sales charge".

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Mutual fund timing is a legal but frowned-upon practice that has a negative effect on a fund's long-term investors. Mutual fund timing means that investors may be subjected to higher fees occasioned by the transaction costs of the short-term trading of fund shares. After the designated minimum holding period for an investment in a fund has elapsed, investors are not charged for redeeming shares of the investment. If incurred, redemption fees do not go to the investment company, but are credited to the fund's assets.

REGIONAL FUND A mutual fund that confines itself to investments in securities from a specified geographical area, such as Latin America, Europe or Asia. A regional mutual fund will generally look to own a diversified portfolio of companies based in and operating out of its specified geographical area. However, some regional funds can also be set up to invest in a specific segment of the region's economy, such as energy. For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area. These funds are practical for the average investor, since most people wouldn't have enough capital to adequately diversify themselves across many investments in the region. Regional funds select securities that pass geographical criteria. They are not to be confused with other mutual funds such as international funds, which attempt to provide investors with a diversified portfolio spanning the globe, or country funds, which provide investors with diversified exposure to companies in one specific nation. REGULATED INVESTMENT COMPANY - RIC A mutual fund or real estate investment trust that is eligible to pass the taxes on capital gains, dividends, or interest payments onto the clients or individual investors. This is done to help avoid "double taxing" for investment distributions. RELATIVE RETURN The return that an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the asset and the return achieved by the benchmark.

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Relative returns are most often used when reviewing the performance of a mutual fund manager. Because holders of mutual funds are charged management fees, they expect a manager to achieve returns higher than the benchmark index. For example, if the fund you are holding achieves an absolute return of 12% over the past year while the benchmark index provides a return of 15%, then the fund has achieved a relative return of -3% for the year.

RIGHTS OF ACCUMULATION - ROA A right that allows a shareholder to receive reduced sales charges when the amount of mutual funds purchased, plus the amount already held, equals an ROA breakpoint. In addition, there is no time limit on how long the mutual fund needs to be held to qualify for a ROA. For example: You wish to buy $2,000 of Fund ABC with a sales charge of 5.50% to add to your existing $19,000 of the same fund in your account. Given that Fund ABC is linked to an ROA and that the breakpoint is $20,000, you would qualify for a reduced sales charge (i.e. 5.25%). Also, the entire purchase ($2,000) would qualify for the reduced sales charge and not just the amount in excess of $20,000. RISK MEASURES Statistical measures that are historical predictors of investment risk and volatility and major components in modern portfolio theory (MPT). MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock fund compared to its benchmark index. There are five principal risk measures:

1. Alpha: Measures risk relative to the market or benchmark index

2. Beta: Measures volatility or systemic risk compared to the market or the benchmark index

3. R-Squared: Measures the percentage of an investment's movement that are attributable to movements in its benchmark index

4. Standard Deviation: Measures how much return on an investment is deviating from the expected normal or average returns

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5. Sharpe Ratio: An indicator of whether an investment's return is due to smart investing decisions or a result of excess risk.

Each risk measure is unique in how it measures risk. When comparing two or more potential investments, an investor should always compare the same risk measures to each different potential investment to get a relative performance. RISK-ADJUSTED RETURN A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios. There are five principal risk measures: alpha, beta, r-squared, standard deviation and the Sharpe ratio. Each risk measure is unique in how it measures risk. When comparing two or more potential investments, an investor should always compare the same risk measures to each different investment in order to get a relative performance perspective. S&P PHENOMENON The tendency for a stock that is newly added to the S&P index to temporarily increase in price. When the S&P 500 makes adjustments to the list of companies within the index, fund companies and portfolios that follow the index also make adjustments to their held stocks. Since these entities are all trading large blocks of the same stock, its share price temporarily increases. SALES CHARGE A commission paid by an investor on his or her investment in a mutual fund. The sales charge is paid to a financial intermediary (broker, financial planner, investment adviser, etc.) for selling the fund and is intended to provide compensation for the financial salesperson's efforts in assisting clients in selecting the mutual funds best suited to their needs. A large number of mutual funds carry sales charges. The amount of a sales charge represents the difference between the purchase price per share paid by the investor and the net asset value per share of the mutual fund. By regulation, the maximum permitted sales charge is 8%,

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but most loads fall within a 3-6% range. With funds that carry a sales charge, there are three classes of shares: A, B, and C. The letter designations indicate the timing of when the charge is paid. For Class A shares, the sales charge is paid at the time of purchase (front-end load). For Class B shares, it is due when the shares are sold (back-end load). Class C shareholders incur a sales charge on a regular basis for as long as they hold the fund.

SECTOR FUND A stock mutual, exchange-traded or closed-end fund that invests solely in businesses that operate in a particular industry or sector of the economy. Because the holdings of this type of fund are in the same industry, there is an inherent lack of diversification associated with these funds These funds tend to increase substantially in price when there is an increased demand for the product or service offering provided by the businesses in which the funds invest. On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will often face heavy losses as a result of the lack of diversification in its holdings. SERVICE SHARES Mutual fund units that charge service fees to their shareholders. The purpose of these fees is to compensate individuals who answer investor inquiries and provide information to the public or to investors about the fund. FINRA, (formerly the NASD), limits funds from charging service fees in excess of 0.25% of their average net assets per year.

Some mutual funds charge investors front-end or back-end loads. Others charge service fees to cover internal expenses for people that answer shareholder questions and inquiries. Because these fees occur consistently year after year, they can have a significant adverse impact on returns over time. SHARPE RATIO A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

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The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to instead measure only return against downward price volatility.

SHORT FORM PROSPECTUS DISTRIBUTION SYSTEM - SFPDS A system that allows firms making an issue to produce a short form prospectus. The short form prospectus must contain any material changes not previously reported. There are some issuers who continuously disclose information, and they have the opportunity to use the SFPDS. This system is quicker and more cost effective than the conventional means of distributing a prospectus. SHORT-TERM INVESTMENT FUND - STIF A type of fund that invests in short-term investments of high quality and low risk. The goal of this type of fund is to protect capital with low-risk investments while achieving a return that beats a relevant benchmark such as a Treasury bill index. Short-term investment funds comprise cash, bank notes, corporate notes, government bills and various safe short-term debt instruments. These types of funds are usually used by investors who are temporarily parking funds before moving them to another investment that will

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provide higher returns. These funds traditionally have low management fees, usually well below 1% a year. SINGLE-COUNTRY FUND A mutual fund that restricts its investment to the assets of one country and is able to allocate its funds only within the range of investment instruments available in the specified country. This restriction is based on the mutual fund prospectus. If the fund's prospectus states that it is only investing in one country, the fund is bound by this statement. Also known as a "country fund". For example, a single-country fund for Russia will only invest in assets based in that country, such as the stocks of Russian companies, Russian government debt and other Russia-based financial instruments. SOFT DOLLARS A means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard dollar fees). The investing public tends to have a negative perception of soft dollar arrangements because they believe that buy-side firms should pay expenses out of their profits, rather than from investors' pockets. As such, the use of hard dollar compensation is becoming more common. For example, a mutual fund may offer to pay for research from a brokerage firm by executing trades at the brokerage. Let's say, that Cory's Large-Cap Value Fund (CLCV) wants to buy some research from XYZ brokerage firm. CLCV may agree to spend at least $10,000 in commissions for brokerage services in return for research from XYZ. This would represent a soft dollar payment. Alternatively, if CLCV wanted to simply buy the research from XYZ and not agree to any kind of soft dollar fee, it might have to pay the brokerage firm $7,000 in "hard dollars" (cash) for the service. SPIDERS – SPDR A short form of Standard & Poor's Depository Receipt, an exchange-traded fund that tracks the S&P 500 Index Each share of a spider contains one-tenth of the S&P index and trades at roughly one-tenth of the dollar-value level of the S&P 500.

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Spiders are listed on the American Stock Exchange under the ticker symbol SPY. By trading like stocks, spiders have continuous liquidity, can be short sold, bought on margin, provide regular dividend payments and incur regular brokerage commissions when traded. Spiders are used by large institutions and traders as bets on the overall direction of the market. They are also used by individual investors who believe in passive management (index investing). In this respect, spiders compete directly with S&P 500 Index funds. SPREAD-LOAD CONTRACTUAL PLAN A fee-payment structure applicable to mutual funds in which the sales charge or commission (load) is not entirely paid at the time the investor first contributes funds to the mutual fund (or in the first several contributions either). Instead, the mutual fund load is dispersed across an extended time period, so that the load is more accurately applied to each contribution. This type of load payment plan allows greater portions of the investor's initial contributions to the account to be applied to actual investments, instead of sales charges. By doing so, the investor is able to gain a relatively larger position in the mutual fund in the short term, but their future contributions to the fund will be marginally smaller than they would have been without such a plan. STERLING RATIO A ratio used mainly in the context of hedge funds. This risk-reward measure determines which hedge funds have the highest returns while enduring the least amount of volatility. The formula is as follows:

This formula uses the average for risk (drawdown) and return over the past three years. Drawdown is calculated at the maximum potential loss in the given year. Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment(s) are receiving a higher return relative to risk. The Sterling ratio is similar to the Sharpe ratio and the Sortino ratio, as it also produces a risk-adjusted return measurement. The Sterling ratio, along with the Sortino ratio, is primarily used by

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hedge funds as a way of advertising superior risk management. STEWARDSHIP GRADE An evaluative data point in Morningstar's fund and stock reports that assesses the quality of a company's governance practices. Stewardship grades for both funds and stocks range from 'A' (excellent) to 'F' (very poor) based on criteria that measures the effectiveness of fund and corporate managers to consistently act with their shareholders' best interests in mind. Morningstar initiated its stewardship grades for both the funds and stocks covered by its investment research services in 2004 in response to the mutual fund and corporate scandals prevalent at that time. Morningstar sees a high level of managerial stewardship as an important investment quality for investors to seek out in their selection of funds and stocks. For funds, five areas of stewardship are evaluated: corporate culture, board quality, manager incentives, fees and regulatory issues. For stocks, three broad areas are examined: transparency in financial reporting, shareholder friendliness, and incentives, ownership and overall stewardship. STRATEGIC ASSET ALLOCATION A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation. At the inception of the portfolio, a "base policy mix" is established based on expected returns. Because the value of assets can change given market conditions, the portfolio constantly needs to be re-adjusted to meet the policy. STRUCTURED FUNDS A fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation. These funds use fixed-income securities to give the fund capital protection through principal repayment along with the added gain of interest payments. The fund uses options, futures and other derivatives, which are often based on market indexes, to provide exposure to capital appreciation.

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These products are attractive to investors looking for downside protection who would also like to see gains from upside movements in the markets. Depending on the fund, the exact products and guarantees will vary. For example, if an S&P 500 structured fund protects 80% of its principal, this means that it will invest 80% of its funds in fixed-income products with little chance of falling below the principal amount. The rest of the fund is invested in derivatives that are exposed to the S&P 500 index. Investor will gain as the S&P 500 advances and will lose as it falls, but the fund won't fall below 80% of its starting value. STYLE The investment approach or objective that a fund manager uses to make choices in the selection of securities for the fund's portfolio. While there are a variety of styles, there are nine basic investing styles for both equity and fixed-income funds. For stock funds, company size and value/growth characteristics determine the style. For bonds, style is defined by maturities and credit quality. The specific size parameters for stocks are large, medium and small-sized companies, which are determined by market capitalization. Value, growth and a value/growth blends are the three basic categories for stocks. Bond maturities are categorized as short term, intermediate term and long term. Credit quality is determined by a bond's status as a government or agency issue (high) and credit ratings for corporates and municipals of 'AAA' to 'AA' (high), 'A' to 'BBB' (medium) and 'BB' to 'C' (low). Variations and combinations of these basic categories, as well as consideration of special industries, industry sectors and geographic location, create investment styles for both stock and bond funds beyond the basic nine categories for each. STYLE BOX Created by Morningstar, a style box is designed to visually represent the investment characteristics of fixed-income (bond), domestic equity (stock) and international equity (stock) securities and their respective mutual funds. A style box is a valuable tool for investors to use to determine the asset allocation and risk-return structures of their

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portfolios and/or how a security fits into their investing criteria. There are slightly different style boxes used for equity and fixed-income funds For stock funds (domestic and international), the horizontal axis of the style box is divided into three investment style categories: value, blend (a value/growth mix) and growth. The vertical axis is divided into three company-size (based on market-capitalization) indicators: large, medium and small. For bonds and bond funds, the horizontal axis is divided into three maturity categories: short-term, intermediate-term, and long-term. The vertical axis is divided into three credit-quality categories: high, medium and low (BB-C). Investors can use a style box to put together mutual fund portfolio and visually see the results as a total picture. For example, an investor looking for a relatively safe stock fund would seek out one categorized as a large-cap value fund. If that same investor is willing to accept more risk for the opportunity of a greater return, he/she might select a fund in the small-cap growth category. Putting dollar values on the fund selections in the same and/or differing category squares will readily reflect the risk-return parameters of the whole portfolio. STYLE DRIFT The divergence of a mutual fund from its stated investment style or objective. Style drift occurs as a result of intentional portfolio investing decisions by management, a change of the fund's management or, in the case of stocks, a company's growth. Generally, a portfolio manager's ability and commitment to managing a fund's assets according to its stated investment style over the course of several years is a positive investment quality. For obvious reasons, consistency in this particular area is preferable to style drift. Managers chasing performance have been known to resort to using different strategies, which are often counterproductive and can change the risk-return profile of the fund. Nevertheless, fund investors need to exercise some flexibility in making judgments of a fund's investment style stability. Some funds allow for a "go-anywhere" style, which means that the manager will do just that. Also, it is not unusual for small cap and mid cap companies to grow in size, which means that a fund may shift capitalization categories accordingly. Circumstances can justify giving the fund manager some leeway. As such, a history of consistent, above average total returns

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should override any concerns about style drift. SUB-ADVISED FUND An atypical fund structure in which a fund, such as a hedge fund or mutual fund, is managed by another management team or firm than where the assets are held. Sub-advised funds are often found in wrap programs or variable annuities. Sub-advised funds are often smaller versions of larger mutual funds and hold the same stock proportions as the larger mutual fund. Because there are two management companies being paid, sub-advised funds can often have layered fees, so these funds should be examined closely before deciding to invest. SURVIVORSHIP BIAS The tendency for mutual funds with poor performance to be dropped by mutual fund companies, generally because of poor results or low asset accumulation. This phenomenon, which is widespread in the fund industry, results in an overestimation of the past returns of mutual funds. Also known as "survivor bias". For example, a mutual fund company's selection of funds today will include only those that have been successful in the past. Many losing funds are closed and merged into other funds to hide poor performance. This is an important issue to take into account when analyzing past performance. SWITCHING In mutual funds, the process of transferring an investment from one fund to another. Investors may switch their assets between funds in the same family or into a different family entirely. Generally, no-load funds do not charge for these transactions. However, some brokerages may charge a commission. SYSTEMATIC WITHDRAWAL PLAN - SWP A service offered by a mutual fund that provides a specific payout amount to the shareholder at predetermined intervals, generally monthly, quarterly, semiannually or annually. Three main reasons for using SWPs are to meet living requirements

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(usually when retired), for tax planning purposes, or to comply with mandatory retirement plan withdrawal rules after reaching age 70.5. TACTICAL ASSET ALLOCATION - TAA An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors. This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace. It is as a moderately active strategy since managers return to the portfolio's original strategic asset mix when desired short-term profits are achieved. TARGET DATE FUND A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.

These funds have become popular with 401(k) plan investors. While proponents cite the convenience to investors of putting their investing activities on autopilot in one fund, critics are wary of these funds' one-size-fits-all approach.

THIRD-PARTY DISTRIBUTOR The name given to institutions that sell or distribute mutual funds to investors for fund management companies without direct relation to the fund itself. For mediating these transactions, third-party distributors receive a portion of the trailer fees associated with mutual fund sales for acquiring new business. This arrangement works well for fund companies that don't have the necessary resources to enter new markets and instead decide to outsource to existing fund marketing companies. TOTAL EXPENSE RATIO - TER A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist

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primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER:

The size of the TER is important to investors, as the costs come out of the fund, affecting investors' returns. For example, if a fund generates a return of 7% for the year but has a TER of 4%, the 7% gain is greatly diminished (to roughly 3%). More often referred to as "expense ratio".

TRACKER FUND An index fund that tracks a broad market index or a segment thereof. Such a fund invests in all, or a representative number, of the securities within the index. Also know as an "index fund". The term "tracker fund" comes from the tracking function of index fund management, which attempts to replicate the performance of a market index. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500. TRAILER FEE A fee that a mutual fund manager pays to a salesperson who sells the fund to investors. The trailer fee pays the salesperson for providing the investor with ongoing investment advice and services. Also known as a "trailer commission". It is important to know whether your mutual fund salesperson is receiving a trailer fee because it may cause him or her to try to sell you a particular fund not because it is a good investment but because selling it to you will make him or her money. This fee is paid annually for as long as the investor holds shares in the fund. TURNOVER RATIO The percentage of a mutual fund or other investment vehicle's holdings that have been "turned over" or replaced with other holdings in a given year. The type of mutual fund, its investment objective and/or the

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portfolio manager's investing style will play an important role in determining its turnover ratio. For example, a stock index fund will have a low turnover rate, but a bond fund, whether passively or actively managed, will have high turnover because active trading is an inherent quality of bond investments. An aggressive small-cap growth stock fund will generally experience higher turnover than a large-cap value stock fund. All things being equal, investors should favor low turnover funds. High turnover equates to higher brokerage transaction fees, which reduce fund returns. Also, the more portfolio turnover in a fund, the more likely it will generate short-term capital gains, which are taxable at an investor's ordinary income rate. Turnover ratios for a mutual fund will vary from year to year, but the general range can be assessed by looking at the figure over a few consecutive years. UNDERWEIGHT 1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. This often occurs when a portfolio is actively managed and underweighting a security may allow the portfolio manager to achieve returns greater than that of the benchmark. Portfolio managers can make the securities underweight if they believe will underperform when compared to other securities in the portfolio. For example consider a security in the benchmark portfolio with a weight of 10%. If the manager believes the security will underperform over a certain time period, they will allocate the security a weight of less than 10% for that period, in hopes of increasing the portfolios expected return. 2. An analyst's opinion regarding the future performance of a security. Underweight will usually mean that the security is expected to underperform either its industry, sector, or even the market altogether. An example of an analysts underweight definition is: The stock's return is expected to be below the average return of the industry over the next eight to 12 months. Analyst's definitions vary regarding the time frame used and the benchmark the security is compared against.

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UNIT INVESTMENT TRUST - UIT An investment company that offers a fixed, unmanaged portfolio, generally of stocks and bonds, as redeemable "units" to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. Unit investment trusts are one of three types of investment companies; the other two are mutual funds and closed-end funds. Each unit typically costs $1,000 and is sold to investors by brokers. UITs can be resold in the secondary market. A UIT may be either a regulated investment corporation (RIC) or a grantor trust. The former is a corporation in which the investors are joint owners; the latter grants investors proportional ownership in the UIT's underlying securities. UNIT TRUST - UT An unincorporated mutual fund structure that allows funds to hold assets and pass profits through to the individual owners, rather than reinvesting them back into the fund. The investment fund is set up under a trust deed. The investor is effectively the beneficiary under the trust. See also "unit investment trust". The success of a unit trust depends on the expertise and experience of the management company. Common types of investments undertaken by unit trusts are property, securities, mortgages and cash equivalents. In the U.K. the term "unit trust" is synonymous with "mutual fund" as it is used in North America. VALUE ADDED MONTHLY INDEX - VAMI An index that tracks the monthly performance of a hypothetical $1000 investment. The calculation for the current month's VAMI is: = Previous VAMI x (1 + Current Rate of Return) The value-added monthly index charts the total return gained by an investor from reinvestment of any dividends and additional interest gained through compounding. The VAMI index is sometimes used to evaluate the performance of a fund manager. VALUE AT RISK - VAR A technique used to estimate the probability of portfolio losses based

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on the statistical analysis of historical price trends and volatilities. VaR is commonly used by banks, security firms, and companies that are involved in trading energy and other commodities. VaR is able to measure risk while it happens and is an important consideration when firms make trading or hedging decisions. VALUE FUND A stock mutual fund that primarily holds stocks that are deemed to be undervalued in price and that are likely to pay dividends. Value funds are one of three main mutual fund types; the other two are growth and blend (a mix of value and growth stocks) funds. Every large mutual fund family has a value fund component in which funds are often broken down by size. For example, a fund family may include small-, mid- and large-cap value funds for investors to choose from. The premise of value investing is that the market has inherent inefficiencies that enable companies to trade at levels below what they are actually worth. In theory, once the market corrects these inefficiencies, the value investor will see the share price rise. A common misconception is that value investors simply seek out stocks with low price/earnings ratios. Although this can be a characteristic of an undervalued company, this is not the sole feature that astute value investors seek. VENTURE CAPITAL FUNDS An investment fund that manages money from investors seeking private equity stakes in startup and small- and medium-size enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. Theoretically, venture capital funds give individual investors the ability to get in early at a company's startup stage or in special situations in which there is opportunity for explosive growth. In the past, venture capital investments were only accessible to professional venture capitalists. While a fund structure diversifies risk, these funds are inherently risky. VOLUNTARY ACCUMULATION PLAN An investment method where a retail investor periodically invests (at their discretion) relatively small amounts of funds into a mutual fund,

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building a comparatively large position over an extended period. By investing savings into a mutual fund gradually over time with a voluntary accumulation plan, an investor is able to build a large investment at their own pace, since their contributions are voluntary (although common practice is to invest a fixed amount at specified intervals). By spreading their contributions over a period of time, investors reap the benefits of dollar-cost averaging, as their fixed dollar amount contributions will buy more shares of a mutual fund when its price is low than when it is high. VULTURE FUND A fund that buys securities in distressed investments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy. Even highly leveraged firms may be targeted if there is a chance that the owners will not be able to make all required debt payments. As the name implies, these funds are like circling vultures patiently waiting to pick over the remains of a rapidly weakening company. The goal is high returns at bargain prices. Some people have looked down upon hedge funds that operate like vulture funds, which have preyed on the cheap debt of struggling companies and forced these companies to pay it back, plus interest. WEIGHTED AVERAGE CREDIT RATING The weighted average of all the bond credit ratings in a bond fund. The measure gives investors an idea of how risky a fund's bonds are overall. The lower the weighted average credit, rating the riskier the bond fund. The weighted average credit rating is expressed as a regular letter rating (AAA,BBB, CCC). To arrive at the weighted average credit rating, the calculation starts with dividing the value of each bond in the fund by the total value of the fund. This gives the individual bond weights. The weight of a bond in the fund determines how much that bond influences the weighted average credit rating. For example if a bond fund has 95% AAA government bonds and 5% junk bonds, the bond fund would still have a weighted average credit rating of AAA. WINDOW DRESSING A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund

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performance before presenting it to clients or shareholders. Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings. Another variation of window dressing is investing in stocks that don't meet the style of the mutual fund. For example, a precious metals fund might invest in stocks that are in a hot sector at the time, disguising the fund's holdings, so clients really have no idea what they are paying for. Window dressing may make a fund appear more attractive, but you can't hide poor performance for long. WITHDRAWAL PLAN 1. A payment structure arranged with a mutual fund in which the investor receives a set amount of funds from the fund on a periodic basis. This is also called a "systematic withdrawal plan". This type of arrangement with a mutual fund affords the investor an income stream during their retirement years while also maintaining exposure to further growth by keeping their remaining funds invested in the mutual fund for as long as possible. 2. Any strategy in which an investor liquidates a portion of their portfolio and extracts cash periodically, such as an investor selling equity shares every year to help supplement their retirement. Once an investor has finished the accumulation phase, most generally prefer to structure their spending so that their funds will last for an extended period of time. This can be done by managing a portfolio and periodically selling assets, investing in income-producing securities, purchasing an annuity, etc. WORLD FUND A mutual fund that invests in securities from several different countries, including the United States. World funds typically have a significant portion of their capital invested in U.S.-listed securities, but also spread their investment capital among securities from several other countries. This structure limits exposure to any specific country and limits exchange rate risks.

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It's important to not confuse "international funds" with "world funds". International funds invest exclusively in securities from countries outside of the United States, while world funds can have up to 75% of their capital invested in U.S. securities. In contrast, "country funds" are mutual funds that limit their investments to securities from one particular country. The common argument for the benefits of world funds is that, while still based on the U.S. market, world funds allow their managers to select the best securities out of the global marketplace, instead of being limited to selecting only from a given country and missing out on potentially better investments.

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