Fund Analyzer Glossary
Taxes are one of the most significant costs of investing in mutual funds and can vary significantly from fund to fund. The SEC now requires that most mutual funds report their after-tax returns in their prospectus. Typically, after-tax returns are shown using the highest individual federal income tax rate. They do not reflect the impact of state or local taxes. After-tax returns are presented in two ways:
- Return after Taxes on Distributions includes the effect of taxable distributions by a fund to its shareholders and reflects the tax effect of a portfolio manager's purchases and sales of securities in the fund. The law requires a fund to make a capital gains distribution to shareholders if it sells a security for a profit that can't be offset by a loss. If you receive a capital gains distribution, you will likely owe taxes on it — even if the fund has had a negative return since you invested in it.
- Return after Taxes on Distributions and Sale of Fund Shares also includes any taxable gain or loss realized by a shareholder on the sale of a fund's shares.
While you may not be taxed at the maximum individual income tax rate, using after-tax returns will allow you to understand the potential magnitude of tax costs and compare the impact of taxes on the performance of different funds.
Mutual funds with front-end loads or sales charges enable you to reduce front-end sales charges as the amount of your investment increases to certain levels called "breakpoints". Check the prospectus to see if a breakpoint will reduce the front-end sales charge. For more information on breakpoints, please read Investor Alert — Mutual Fund Breakpoints: A Break Worth Taking.
A single mutual fund, with one portfolio, may offer more than one "class" of shares to investors. Each class represents a similar interest in the mutual fund's portfolio, but has different fees and expenses. You can find out if a mutual fund has different classes by looking at the prospectus. Here are the basic definitions of Class A, B, and C shares:
- Class A Shares - These shares typically charge a front-end sales charge that is deducted from the initial investment. Class A shares almost always charge a 12b-1 fee, but it's generally lower than the 12b-1 for other classes.
- Class B Shares - These shares typically do not charge a front-end sales charge. So, unlike Class A shares, all your money is immediately invested. Class B shares normally impose a contingent deferred sales charge (CDSC). The CDSC normally declines each year and is eliminated after a number of years. Class B shares often then "convert" into Class A shares. When they convert, they will begin to charge the same annual fund operating expenses as Class A shares. Before they convert, Class B shares usually have higher annual fund operating expenses than Class A shares.
- Class C Shares - These shares typically do not charge a front-end sales charge. So, unlike Class A shares, all your money is immediately invested. Often Class C shares impose a small charge if you sell your shares within a short time of purchase, usually one year. Class C shares also typically impose higher annual fund operating expenses than Class A shares.
Some mutual funds may offer additional classes of shares.
Fees paid to a broker for executing a trade, such as buying or selling stock or an ETF.
A common type of deferred sales charge. The CDSC normally declines each year and is eliminated after a number of years.
Sometimes a class of fund shares will convert to another class of shares after a period of time. This means that you will begin to pay the fees and expenses charged by the class to which your funds were converted.
You can find out whether a class converts to another class in the prospectus.
The fee charged when you sell mutual fund shares. A common type of deferred sales charge is a contingent deferred sales charge (CDSC).
You can find the deferred sales charge in the fee table in the front of a fund's prospectus or on the fund family's Web site.
A back-end load can be calculated either on the amount of the original investment or on the value of the investment at the time you sell the fund.
Exchange-Traded Funds (ETF)
Exchange-traded funds, like index mutual funds, are baskets of stocks that track a particular stock market index, such as the Standard and Poor's 500 Index. But ETFs trade just like stocks. You can buy or sell shares during market hours, and the prices of ETFs change throughout the trading day — just as with stocks. When you buy or sell mutual funds, on the other hand, shares are always priced at the shares net asset value (NAV) as of the close of the trading day. ETFs differ from mutual funds in several ways. Unlike mutual funds, ETFs don't have sales charges or loads. Rather, you are typically charged a commission when you buy or sell an ETF. Like mutual funds, you will have to pay annual fund operating expenses.
Exchange-Traded Note (ETN)
Exchange Traded Notes (ETNs) are issued as senior, unsecured, unsubordinated debt, and are linked to the performance of an index, underlying security or commodity. ETNs trade on an exchange, just like stocks and ETFs. ETNs carry a credit risk in terms of the issuer’s ability to pay on the note.
Found in a fund's prospectus, this table describes the fees and expenses that you may pay if you buy and hold shares of the fund.
International Stock Fund
This type of fund generally invests in stocks and bonds of companies located outside the United States.
Large-Cap (or Large Capitalization) Stocks
Stocks of bigger companies whose market value is above a designated minimum, such as $5 billion.
Mid-Cap (or Mid Capitalization) Stocks
Stocks of mid-sized companies whose market value falls between a designated minimum and maximum, such as $1 billion to $5 billion.
In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar developed the Morningstar Categories. While the prospectus objective identifies a fund's investment goals based on the wording in the fund prospectus, the Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio and other statistics over the past three years). For more information on Morningstar Categories and how they are determined, you can check out Morningstar's data definition section. (Source: Morningstar.com)
Morningstar rates mutual funds from one to five stars based on how well they've performed (after adjusting for risk and accounting for all sales charges) in comparison to similar funds. Within each Morningstar Category, the top 10% of funds receive five stars, the next 22.5% four stars, the middle 35% three stars, the next 22.5% two stars, and the bottom 10% receive one star. Funds are rated for up to three time periods--three-, five-, and 10 years--and these ratings are combined to produce an overall rating. Funds with less than three years of history are not rated. Ratings are objective, based entirely on a mathematical evaluation of past performance. They're a useful tool for identifying funds worthy of further research, but shouldn't be considered buy or sell recommendations. For more information on Morningstar Ratings and how they are calculated, you can check out Morningstar's data definition section. (Source: Morningstar.com)
Morningstar Prospectus Objective
Indicates a particular fund's investment goals, based on the wording in the prospectus. Prospectus objectives are qualities like: Aggressive Growth, Asset Allocation, Balanced, Equity-Income, Growth and Income, etc. For more information on Morningstar Prospectus Objectives and how they are determined, you can check out Morningstar's data definition section. (Source: Morningstar.com)
Morningstar Style Box
The style box, which Morningstar invented in 1992, is a nine-section grid designed to help investors see what types of holdings dominate a fund's portfolio. The equity style box, used for classifying stock-fund portfolios, is divided into rows by market cap (large, mid, and small) and columns by investment style (value, blend, growth). On the bond side, the rows denote credit quality (high, medium, low) while the columns indicate duration, a measure of interest-rate sensitivity (short, intermediate, long). For more information on the style boxes and how they are calculated, you can check out Morningstar's data definition section. (Source: Morningstar.com)
Debt obligations issued by state or local governments to fund public projects. Municipal bond dividends are exempt from federal income taxes, and may also be exempt from state and local income taxes.
An investment vehicle that raises money from investors and invests it in stock, bonds, or other securities. Most funds have a portfolio manager or team that selects the investments for the fund. You can learn about a fund's investment objectives and its portfolio manager by reading the fund prospectus.
NAV - Net Asset Value
NAV- Net Asset Value when associated wtih fund purchases is primarily used when describing the ability for a investors to purchase shares with their full dollar value. NAV Transfers may be available allowing the waiving of front-end sales charges when moving money between two funds in the same fund family. Further information on NAV transers can be found in FINRA's Investor Alert - Net Asset Value Transfers: Look Before You Leap Into Another Mutual Fund.
Every fund has a prospectus that provides information about the fund, as required by securities regulators. You can get a prospectus from the fund company (Web site, phone or by mail) or your financial adviser.
Redemption Fee Schedule
Fee paid by the shareholder to exit the fund for holding shares less than a predefined time period.
A fee charged when you purchase mutual fund shares. For example, suppose you want to spend $10,000 to purchase mutual fund shares, and the mutual fund imposes a front-end sales charge of 5%. You will be charged $500, and you will receive shares with a market value of $9500. A mutual fund may offer you a discount if you:
- Want to make a large purchase
- Already hold other mutual funds offered by the same fund family
- Commit to regularly purchasing the mutual fund's shares.
You should ask your financial adviser whether these discounts or breakpoints are available to you. Not all mutual funds have a sales charge or load. Many mutual funds, called no-load funds, have no sales charge or load. You can find the sales charge in the fee table in the front of a fund's prospectus.
Small-Cap (or Small Capitalization) Stocks
Stocks of smaller companies whose market value is below a designated minimum, such as $1 billion.
Mutual funds that invest in equity securities, representing shares of ownership in the issuing company. A fund may buy a number of different stocks based on the fund's objective, which you can read about in the fund prospectus.
All funds have annual fund operating expenses. These are fees you do not directly pay, but which are taken out of the fund's assets. Total annual fund operating expenses include:
- Management Fees - These fees include amounts paid to the fund's investment advisor for managing the fund's portfolio and providing other services, such as shareholder record keeping and preparing shareholder statements and reports.
- 12b-1 Fees - Named after a Securities and Exchange Commission (SEC) rule, these fees include costs of distributing the fund shares to investors.
- Other Expenses - These expenses include any other annual fund expenses.
The total of total annual fund operating expenses and other expenses and fees over the time period you selected.
Total Sales Charges