Mutual Fund Glossary

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  1. Acquisition Plan
    Offers mutual fund investors the possibility of making automatic periodic purchases of units.
  2. Account Closing Fees
    A charge levied by a few mutual funds when clients close their accounts.
  3. Active Management
    An investment management style employed by managers who believe that financial markets present occasional inefficiencies which can be exploited to earn excess returns. Proponents of this approach will try to add value through strategies such as market timing and individual security selection.
  4. Active Trading
    The buying and selling of securities that are believed to be undervalued or over valued, with the hope of earning excess returns.
  5. Ability to Bear Risk
    The financial and psychological readiness of an individual to bear the day to day fluctuations in the value of their investments. People who are unable to tolerate risk are said to be risk-averse. Those who like to take risks are risk-loving.
  6. After-tax Return
    The return on an investment after taking into consideration the tax treatment of the particular type of return generated (i.e.interest, dividends, or capital gains). Each country has a different tax treatment for the various types of income.
  7. Amortization Period
    The period during which the entire principal amount of a mortgage loan is to be repaid to the mortgagee.
  8. Annualized Yield
    For money market funds, the daily yield multiplied by 365.
  9. Approximate Yield to Maturity(AYM)
    A formula used to closely estimate the yield to maturity (YTM). This formula can be used when precise figures are not required.
  10. Arithmetic Mean Return
    A somewhat inaccurate method of calculating average annual return. It involves adding up the annual returns and dividing by the number of years.
  11. Asset Allocation
    The weight of the various components(cash, debt, equity, and money market securities) of an investor’s portfolio.
  12. Asset Allocation Funds
    See Balanced Mutual Funds – two names for the same thing.
  13. Assets
    All things of value that are owned by a firm or individual.
  14. Average Annual Return
    The average of the simple annual returns earned on an investment over a given number of years.
  15. Backward Pricing
    An illegal method of calculating the price an investor will pay for a mutual fund unit. It involves using a previous day’s closing price instead of the next closing price.
  16. Balance Sheet
    Is a snapshot of the financial position of a firm at a point in time. It shows the balance between what a firm owns and what it owes.
  17. Balanced Mutual Funds
    Hold a diversified portfolio of different types of securities: bonds, stocks, and money market securities. Often the fund manager will vary the proportions depending on market conditions. Also known as Asset Allocation Funds.
  18. Beta
    The standard measure of market risk. It shows how much a security or a portfolio fluctuates when the market as a whole fluctuates.
  19. Blue Chip Common Share
    The common shares of companies that have a record of steady dividend payments, and tend to show consistent growth in share price.
  20. Bond
    A bond is a debt security that may be issued by either a government or a corporation. The issuer of a bond promises to pay a stipulated rate of interest (coupon rate) and to pay back the principal or par value at maturity.
  21. Bond Fund
    A fixed-income fund that invests principally in government and corporate bonds.
  22. Broker/Investment Dealer Distribution
    When stockbrokers and dealers offer other companies’ mutual funds to their clients. These are mutual funds that the broker or dealer has not created and does not manage.
  23. Broker-Managed Funds Distribution
    Refers to the instance where stock brokers both manage mutual funds and distribute them through their own sales force.
  24. Brokerage Services
    An investment broker will provide the service of matching buyers and sellers of securities that have been previously issued by a corporation or a government. Brokers do not usually own the securities they trade.
  25. Business Cycle
    Irregular periodic fluctuations in the level of economic activity. Phases include the peak, contraction or recessionary phase, the trough, and the expansionary phase.
  26. Call Option
    A derivative security that gives the holder the right but not the obligation to purchase a security at a given price by a specific
  27. Call Premium
    Is measured by the difference between a security’s par value and the price the issuer must pay to call it for retirement.
  28. Capital Gain
    When an investor sells an asset for more than its purchase price, a capital gain is realized.
  29. Capital Gains Dividend
    A mutual fund distribution of capital gains generally made at year end and treated, for tax purposes as, capital gains.
  30. Closed End Fund
    Shares of these funds are bought and sold on the open market. A fixed number of shares are issued and their value depends on market demand and on the value of the securities held by the fund. These shares can trade at a discount or a premium.
  31. Closed Mortgage
    Can often be repaid prior to the end of the term, but a penalty will apply.
  32. Coincident Indicators
    These factors change at approximately the same time as the economy. Examples include gross domestic product (GDP),personal income, and retail sales.
  33. Commercial Paper
    A short-term debt security whose issuer promises to pay the maturity value by a stated date. Commercial paper is issued by very creditworthy companies and is therefore quite liquid.
  34. Common Equity Mutual Funds
    Equity funds that invest in the common shares of publicly traded companies.
  35. Common Stock
    A common share is said to represent residual ownership of the issuing company and is therefore entitled to a vote at shareholder meetings. It does not have a stated maturity date and can only be paid dividends after the preferred shareholders have been paid their dividends. Not all companies pay common shareholders dividends and common shareholders are also referred to as residual owners.
  36. Compound Rate of Return
    The average rate of return over several years that assumes compounding. It is sometimes referred to as “total return” and is computed as a “geometric average”.
  37. Compounding
    The effect of reinvesting (rather than spending) the returns on an investment, so that investors earn a “return on the return.”
  38. Continuous Primary Distribution
    Mutual funds are said to be in a state of continuous primary distribution because they are continually issuing new units in the primary market. Since investors always sell their units back to the mutual fund, there is no secondary market for mutual fund units (or shares).
  39. Conventional Mortgage
    When the amount of the mortgage loan does not exceed 80% of the appraised value of the pledged property.
  40. Convertible Bond
    Can be converted to a given number of common shares, generally of the same company. Conversion is usually permitted during periods determined by the issuer or the issuer can force conversion if market conditions warrant it.
  41. Convertible Preferred Share
    Can be converted to a given number of common shares, generally of the same company. Conversion is usually permitted during periods determined by the issuer or the issuer can force conversion if market conditions warrant it.
  42. Corporate Bonds
    Are issued by corporations mainly to finance the acquisition of equipment. They are subject to interest rate risk and are also subject to default risk. Often, specific assets are pledged as collateral to guarantee repayment of the debt.
  43. Correlation of Returns
    A statistical measure of the degree to which the returns on a security are associated with the returns on another security.
  44. Coupon Rate
    The periodic (almost always semi-annual)interest payment that the issuer of a bond has promised to pay the bondholder.
  45. Counterparty Risk
    The risk that the other party to an agreement will default or fail to honour its financial commitment. In an options contract, for example, it refers to the risk to the option buyer that the option writer will not sell the underlying security as initially agreed.
  46. Cumulative Preferred Share
    For these shares, dividends not paid in one period will accumulate and be paid in a later period and all past and present dividends must be paid before any common shares are able to receive a dividend.
  47. Current Assets
    Are assets that are expected to be converted to cash within one year. Cash or cash equivalents are also considered current assets.
  48. Current Income
    Earned from fixed-income funds that make regular interest or dividend payments to the holder. Generally, an investor seeking current income has the intention of living off the proceeds.
  49. Current Liabilities
    Are liabilities that are expected to be settled within one year.
  50. Current Ratio
    A liquidity ratio that is calculated by dividing a firm’s current assets by its current liabilities.
  51. Current Yield
    Is computed by dividing the coupon or dividend payment for one year by the current market price of the security. The current yield is used to compare the short-term return on different securities.For a money market mutual fund it is the average of the last seven days’ annualized yield; it does not assume compounding of returns.
  52. Custodian
    Handles the disbursement and receipt of funds as well as the safekeeping of the securities. This function is performed by a trust company or bank.
  53. Client service
    This involves fully understanding and satisfying the unique needs of each client.
  54. Cyclical Common Share
    The share of a company whose profitability depends to a large extent on the stages in the economic cycle.
  55. Daily Yield
    Is calculated by dividing each day’s earnings by the fund’s net asset value. It is simply the one day yield on the fund.
  56. Debentures
    Are bonds that have no assets pledged as collateral in the case of default.
  57. Debt Position (Financial Leverage)Ratios
    These measure the extent to which a firm uses borrowed funds to finance its operations. See Debt Ratio.
  58. Debt Ratio
    A financial leverage ratio that is calculated by dividing total liabilities by total assets.
  59. Debt Security
    A debt security, such as a bond, evidences a loan which has been made by the investor to the issuer. The issuer of a debt security essentially borrows money from the investor and thereby incurs a debt.
  60. Default Risk
    This is the risk that a mortgage, bond, or preferred share will not make its anticipated interest or dividend payment, or principal will not be repaid at maturity (in the case of mortgages and bonds).
  61. Defensive Common Share
    The common share of a company with stable earnings that exhibit little or no fluctuation in response to seasonal or economic factors.
  62. Demanders of Capital
    These are the users of capital and include individuals, companies, and governments.
  63. Depreciation
    The amount by which the value of fixed assets is periodically decreased to reflect the effects of regular wear and tear.
  64. Derivative Security
    A security whose value is determined by the value of some other security or asset. An example of a derivative security would be an option or a future.
  65. Derivatives Market
    This is the market for derivative securities.
  66. Direct Distribution
    A mutual fund company that has its own centralized order-taking department and sales staff is said to engage in direct distribution.
  67. Diversification
    The process of reducing investment risk by investing in different types of securities issued by companies active in different industries. Ideally, these securities will not all have the same response to economic and other events — as some decrease, others will hopefully increase.
  68. Dividend
    Profits of a company that are distributed to shareholders in direct proportion to the number of shares held.
  69. Dividend Fund
    A type of fixed-income fund that holds dividend paying common shares and possibly preferred shares. Dividend funds are distinguished from preferred dividend funds by the fact that they tend to hold mostly common shares.
  70. Dollar Cost Averaging
    Involves periodically (e.g. monthly)purchasing a fixed dollar amount of mutual fund units. As the unit price fluctuates, so will the number of units purchased. By investing regular dollar amounts in an increasing market, the average cost per unit tends to be lower over the long run.
  71. Dollar Weighted Return
    Also known as the internal rate of return(IRR). All the cash flows generated by an investment discounted at this rate will equal the initial investment.
  72. Duration
    A measure (expressed in years) of a bond or a bond portfolio’s sensitivity to changes in interest rates. The higher (lower)  the duration, the greater (smaller) the change in the value of a bond in response to a given change in interest rates.
  73. Earned Income
    For an individual, it includes all income from employment but it excludes income from investments and any pension or unemployment benefits received.
  74. Earnings Per Share (EPS)
    A shareholder ratio that is calculated by dividing net income by the number of common shares outstanding. Shareholders like to see consistent increases in EPS over time.
  75. Economies of Scale
    In the case of mutual funds, the benefits derived from paying a lower cost per unit when buying securities in large volumes
  76. Economic Indicators
    These are a group of statistics that provide information about the direction and level of activity of the economy.
  77. Effective Yield
    In the case of money market mutual funds, this calculation makes the assumption that the yield generated over the last seven days will remain constant for one year into the future. It assumes daily compounding of returns at the current rate.
  78. Equity Mutual Fund
    Seeks to earn some combination of current dividend income and capital gains. It generally invests in common shares of larger firms with strong dividend records and limited capital gains potential.
  79. Equity Growth Fund
    This type of fund seeks out smaller firms that are expected to pay little or no dividends and to produce significant capital gains as their share prices increase. As a result, equity growth mutual funds tend to have a lot of volatility and are suitable for investors with higher risk tolerance.
  80. Equity Index Fund
    Has the primary goal of earning capital gains by constructing a portfolio designed to mimic a particular stock market index– for example the S&P 500 index in the U.S.A..
  81. Ethical Fund
    A recent type of specialized mutual fund that restricts its investments based on some ethical or moral issue; for example, a fund that invests in the securities of firms that are known to be environmentally friendly.
  82. Ethical Responsibility
    The responsibility of the investment advisor to ensure that the client’s needs are respected and placed before the advisor’s own needs (e.g. attaining a sales target) and those of the employer.
  83. Excess Returns
    The possibility of returns above those needed to compensate for the risk of an investment. Undervalued stocks offer the possibility of excess returns.
  84. Exchange Rate Risk
    The risk that an unexpected change in exchange rates will alter the value of foreign assets or cash payments expected from a foreign source. This type of risk applies to global mutual funds and international mutual funds.
  85. Exchange Traded Funds(ETF)
    The majority of the exchange traded funds are a passive investments. They try to mimic the returns of an exchange or sector of the market. They trade like a stock on the exchange and tend to have very low MERs. They are referred to as ETFs. Starting in 2008, some managed ETFs have appeared on the markets.
  86. Financial Circumstances
     Include the size of the client’s investment portfolio, employment and investment income, whether the source of employment income is secure, and the level of periodic expenses incurred.
  87. Financial Counselling
    This involves setting precise financial goals. The investment advisor does not help the client set financial goals.
  88. Financial Goals and Objectives
    A client’s reasons for selecting a given investment. May be expressed in terms of the types of desired returns (e.g. growth, interest income) or in terms of desired investment characteristics such as safety or liquidity.
  89. Financial Intermediaries
    Suppliers and demanders of capital access the markets through the chartered banks, trust companies, life insurance companies, and investment dealers. These financial intermediaries can be either deposit-taking or non-deposit-taking institutions.
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Mutual Fund Glossary
2013-07-10 03:30:35

List of common terms and meanings-CSI
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