Glossary of terms

Asset Allocation - The proportion of different investment categories—such as stocks, bonds, and cash equivalents—that investors hold in their portfolios.

Asset Class - A group of securities or investments that have similar characteristics and behave similarly in the marketplace. Three common asset classes are equities (e.g., stocks), fixed income (e.g., bonds), and cash equivalents (e.g., money market funds).

Basis Point - One one-hundredth of 1 percent (0.01 percent); thus, 100 basis points equals 1 percentage point. When applied to $1.00, 1 basis point is $0.0001; 100 basis points equals one cent ($0.01). Basis points are often used to simplify percentages written in decimal form.

Benchmark - A standard against which the performance of a security or a mutual fund can be measured. For example, Barclays Capital Aggregate Bond Index is a benchmark index for many bond mutual funds. Many equity mutual funds are benchmarked to the S&P 500 index.

Bond - A debt security issued by a company, municipality, government, or government agency. A bond investor lends money to the issuer and, in exchange, the issuer promises to repay the loan amount on a specified maturity date; the issuer usually pays the bondholder periodic interest payments over the life of the loan. The term fixed-income is often used interchangeably with bond.

Bond Fund - A fund that invests primarily in bonds and other debt instruments.

Capital Gain - An increase in the value of an investment, calculated by the difference between the net purchase price and the net sale price. Contrast capital loss.

Capital Gains Distributions - A distribution to mutual fund shareholders resulting from the fund’s sale of securities held in its portfolio at a profit.

Capital Loss - A decline in the value of an investment, calculated by the difference between the net purchase price and the net sale price. Contrast capital gain

Closed-End Fund - A type of investment company that issues a fixed number of shares that trade intraday on stock exchanges at market-determined prices. Investors in a closed-end fund buy or sell shares through a broker, just as they would trade the shares of any publicly traded company.

Diversification - The practice of investing broadly across a number of different securities, industries, or asset classes to reduce risk. Diversification is a key benefit of investing in mutual funds and other investment companies that have diversified portfolios.

Dividend - Money that a fund or company pays to its shareholders, typically from its investment income, after expenses. The amount is usually expressed on a per-share basis. A dividend is a type of distribution.

Equity - A security or investment representing ownership in a company. By contrast, a bond represents a loan from the investor (owner of the bond) to a borrower (the issuer of the bond). The term equity is often used interchangeably with stock.

Equity Fund - A fund that concentrates its investments in equities. Also known as a stock fund

Exchange-Traded Fund (ETF) - An investment company, typically a mutual fund or unit investment trust, whose shares are traded intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares on the secondary market through a broker, just as they would the shares of any publicly traded company. Authorized participants are the only entities allowed to purchase and redeem ETF shares directly from the ETF.

Face Value - The stated principal or redemption value of a bond; the amount that a bond’s issuer must repay at the bond’s maturity date.

Index - A portfolio of assets that tracks the performance of a particular financial market or subset of it (e.g., stock, bond, or commodity markets) and serves as a benchmark against which to evaluate a fund’s performance. The most common index for equity funds is the S&P 500.

Investment Objective - The goal (e.g., current income, long-term capital growth) that a fund pursues on behalf of its investors. The fund’s investment objective is disclosed to investors in the fund’s prospectus and the fund’s investments must be consistent with the stated investment objective.

Investment Return - The gain or loss on an investment over a certain period, expressed as a percentage. Income and capital gains or losses are included in calculating the investment return.

Investment Risk - The possibility of losing some or all of the amounts invested or not gaining value in an investment.

Management Fee - The amount paid by a client to the investment adviser for its services.

Money Market - The global financial market for short-term borrowing and lending where short-term instruments such as Treasury bills (T-bills), commercial paper, and repurchase agreements are bought and sold

Mutual Fund - An investment vehicle that offers investors professional money management and diversified investment opportunities. All mutual funds are investment companies that are registered with the SEC under the Investment Company Act of 1940. Mutual funds buy a portfolio of securities selected by the fund’s investment adviser to meet a specified investment objective. One hallmark of mutual funds is that they are considered a liquid investment because they issue redeemable securities, meaning that the fund stands ready to buy back its shares at their next computed net asset value (NAV).

Portfolio - A collection of investments owned by an individual or an institution (such as a mutual fund) that may include stocks, bonds, money market instruments, and other investments

Registered Investment Company - Any fund—including a mutual fund—that is registered as an investment company with the SEC under the Investment Company Act of 1940. In addition to registering as an investment company under the Investment Company Act of 1940, shares of the registered investment company must be registered under the Securities Act of 1933 (if they are offered to the public) and the investment company’s investment adviser must be registered with the SEC under the Investment Advisers Act of 1940. Each of these acts imposes regulatory responsibilities on the entities or securities registered under such acts.

Required Minimum Distribution (RMD) - Rules under the Internal Revenue Code that require a person who owns a traditional IRA or 401(k) account to take annual distributions from the IRA or 401(k) account beginning at age 70½. The annual distribution amount is determined by formulas established by the IRS and must be calculated each year based on the owner’s age (or the ages of the owner and the owner’s spouse). The IRS formula is intended to ensure that the entire amount of a traditional IRA or 401(k) account be distributed over the expected life of the individual (or the joint lives of the individual and the individual’s spouse). Distributing less than the required amount will result in a tax penalty. Roth IRAs are not subject to required minimum distributions during the account holder’s lifetime.

Risk - The degree of uncertainty associated with the return on an asset.

Risk Tolerance - An investor’s willingness to lose some or all of an investment in exchange for greater potential returns.

Roth IRA - An individual retirement plan, first available in 1998, that permits only after-tax contributions; earnings are not taxed, and qualified distributions of earnings and principal are generally tax-free.

Security - A general term for stocks, bonds, interests in funds, and other investments.

Stock - A share of ownership or equity in a corporation.

Traditional IRA - The first type of individual retirement account, created in 1974. Individuals may make tax-deductible or nondeductible (depending on income and other requirements) contributions to these accounts.

Yield - A measure of income (dividends and interest) earned by the securities in a fund’s portfolio less the fund’s expenses during a specified period. A fund’s yield is expressed as a percentage of the maximum offering price per share on a specified date.