Although the Securities and Exchange Commission requires that mutual fund companies communicate in plain English, you still might have a tough time understanding all the terms. Here’s a glossary of some of the terms that you might come across when doing your research on mutual funds.
The process of spreading your assets among different types of investments such as stocks, bonds, cash, etc. Asset allocation does not assure a profit or protect against loss.
Bond investment risk
The risk of having money in the bond market. This market is usually tied to interest rates; when interest rates go down, bond prices go up – and when interest rates go up, bond prices go down.
A type of bond investment risk that comes into play when interest rates fall. Companies that have borrowed money will repay their high-interest bonds and refinance them at lower rates. The mutual fund holding the bond will have to reinvest the proceeds, probably at a lower interest rate.
Capital gains distribution
Cash distributions, usually made once a year, of any profits the fund made when securities were sold. Many mutual fund shareholders choose to reinvest this money to purchase more shares of the fund.
The profit that is realized when you sell an asset for a higher price than you paid.
The loss that is realized when you sell an asset at a lower price than you paid.
The risk that the issuer of a bond or similar security fails to make principal and interest payments when due, or that the issuer’s credit rating falls.
The taxable movement of money from a qualified retirement plan or Traditional IRA to a Roth IRA.
The price paid to purchase an asset, including commissions and fees. It is used to calculate capital gains or losses when the asset is sold.
The bank or trust company that maintains a mutual fund’s assets under contract. The custodian is responsible for the safe keeping of the physical securities or keeping records of them, but does not have any involvement in the management of the fund.
A tax-free movement of funds from a qualified retirement plan to another qualified plan or an IRA. A check would be sent to the receiving custodian for the benefit of the shareholder, although in some cases it will be sent to the shareholder’s address. Please note that rolling pre-tax money in a qualified plan directly to a Roth IRA would be a taxable event.
Payment from the fund of dividends or capital gains of the portfolio. Distributions may be paid in cash or reinvested to purchase additional shares of the fund.
A portfolio asset allocation strategy that spreads investments over a broad range of securities and/or asset classes. The goal of diversification is to reduce the portfolio's risk exposure to any one security sector, or asset class, thus balancing the portfolio's risk and return potential. Diversification does not assure a profit or protect against loss.
A distribution of cash from a fund's net income to its shareowners. Dividends can be reinvested to purchase additional mutual fund shares.
Pronounced eee-fah, the Morgan Stanley Capital International Europe, Australasia and Far East Free (EAFE® Free) Index currently measures the performance of stock markets of Europe, Australia, New Zealand, and the Far East. It is often used to evaluate the performance of mutual funds that invest internationally. The EAFE® Free Index is a trademark, service mark and the exclusive property of Morgan Stanley Capital International, Inc.
Eligible rollover distribution
Distributions from a qualified retirement plan that can be rolled over into another retirement plan or an IRA. This may happen if you leave your job, become disabled, die, or get divorced. Please note that rolling pre-tax money in a qualified plan directly to a Roth IRA could be a taxable event.
The sale of shares in one mutual fund to purchase shares in another fund. Please note that an exchange in a non-tax qualified account could be a taxable event.
Foreign investing risk
This is the risk of investing in a mutual fund that invests outside of the United States. The risk may include higher expenses from higher trading and custody costs; fewer accounting, legal, and regulatory protections, depending on where the investment is made; potential political or economical instability; fluctuations in currency exchange rates; and the possibility of exchange control regulation or currency restrictions that could prevent the conversion of local currencies into U.S. dollars.
The risk of distributions from interest or dividends declining because of falling market interest rates.
A pricing benchmark, usually managed by an outside company that measures changes in performance of a group of securities. It can be used to evaluate the performance of a mutual fund or other investment. You cannot invest in an index.
Index mutual fund
A mutual fund that is set up to mimic the performance of an investment index, such as the S&P 500® Index or EAFE®. It is not an investment in the index itself, so its performance may vary slightly.
The risk that an index mutual fund won’t match the performance of an index.
The movement of funds from a qualified retirement plan in which the old custodial company writes out a check to the accountholder rather than to the custodian of the new retirement account. The shareholder must roll the money into another qualified plan or IRA within 60 days to avoid paying tax on the funds.
The risk that the purchasing power of investment funds will go down over time as inflation causes prices to rise. Inflation may also cause the absolute price of some assets to decline.
Interest rate risk
The likelihood of a decline in value in a security because of changes in interest rates. In general, an increase in interest rates will cause bonds to fall in price, while a decline in interest rates will cause them to rise. Also see “Call risk.”
The risk that the mutual-fund manager may have difficulty selling securities that the fund holds when it is time to sell at the price that the fund has placed on those securities.
A fee paid directly from the assets of a mutual fund to compensate the fund's investment advisor for managing the fund's investments.
The risk to the mutual fund that the fund manager’s investment assessments prove to be incorrect, resulting in losses or poor performance.
The risk that securities prices may fluctuate widely over short or even extended periods in response to company, market, or economic news. Securities markets also tend to move in cycles, with periods of rising prices and periods of falling prices. This may affect your mutual fund’s performance and includes the potential for loss.
These investments are interests in pools of mortgages. Investors receive principal and interest as the borrowers make their mortgage payments.
Municipal bond risk
The risk that the value of a municipal security may fluctuate due to changes in politics, taxation, and legislation. It also involves the risk to the economic sectors that municipal securities are normally issued to finance, such as education, health care and transportation.
An investment that pools the money of numerous investors who have similar investment goals and invests that money in a number of securities on their behalf.
Net asset value (NAV)
The current price of a share of a mutual fund. It is calculated daily by taking the fair market value of the fund's total assets (less liabilities) and dividing it by the number of outstanding shares.
The person responsible for administrating a retirement plan or other type of savings plan.
A group of securities that are managed together. In a mutual fund portfolio, the manager is a professional who decides which securities to buy and sell in order to meet the investment objective of the portfolio.
Similar to call risk on a bond, this is the risk that homeowners or consumers may pay off their mortgage or consumer loans early, which in turn affects the yield on mortgage- or asset-backed securities related to those loans.
Realized vs. unrealized capital gain (or loss)
In general, a capital gain (or loss) is realized once the shareowner redeems or exchanges shares from his/her non-tax qualified account for more (or less) than the purchase price. Until then, the gain or loss is considered to be unrealized, sometimes called a paper gain or a paper loss. Unrealized gains or losses are reflected in the net asset value of the unredeemed shares in the account.
The sale of mutual fund shares.
Dividends that are reinvested by the shareowner to purchase additional shares of a mutual fund. These dividends are fully taxable on non-tax qualified accounts and become part of the cost basis of shares held in the account. Also see “Direct Rollover” or “Indirect Rollover.”
Russell 2000® Index
An index that tracks the stock-market performance of 2,000 small U.S. companies. The Russell 2000® Index is a trademark of Russell Investment Group, which maintains and calculates the index.
Any investment vehicle, such as stocks, bonds, and money market instruments.
Shareholder servicing fees
A fee paid directly from the assets of a mutual fund to reimburse the mutual fund company for such expenses related to servicing shareholders' accounts like account statements and telephone service.
Short-term vs. long-term capital gain (or loss)
A short-term capital gain (or loss) is realized if the investment was owned for one year or less. A long-term capital gain (or loss) is realized if the investment was owned for more than one year.
Certification that a signature is genuine, made by an officer or authorized employee of a commercial bank, broker-dealer, or other authorized guarantor. Although it is similar to a notary, a notarized signature is not a substitute for a signature guarantee.
Smaller company size risk
The risk that comes with investing in securities of small-capitalization companies. The securities of small-capitalization companies are often more difficult to value or dispose of, more difficult to obtain information about, and more volatile than stocks of larger, more established companies. In addition, the markets for the Fund's investments may not be actively traded, which increases the risk that the Fund Manager may have difficulty selling securities the Fund holds.
S&P 500® Index
The S&P 500® Index tracks the common stock performance of 500 large U.S. companies. A broad-based, unmanaged, weighted index of the average performance of 500 widely held common stocks. It is considered one of the more accurate measures of overall stock market performance because it includes approximately 75 percent of the market value of all publicly traded equities in the United States. S&P 500® is a trademark of The McGraw-Hill Companies, Inc., which prepares and maintains the index.
Stock investment risk
The risk of investing in stocks. This includes both short-term and prolonged price declines.
The annualized rate of return for a mutual fund, including reinvested income from dividends and capital gains and the capital appreciation or depreciation of the securities within the fund's portfolio.
A tax-free movement of funds from one IRA to another IRA of the same type. The shareowner does not receive the money because the check is made payable to the receiving custodian for the benefit of the shareowner. In most cases, the check is mailed directly to the receiving custodian. Also see “Conversion”.
Legal owner of the assets of a trust who has authority over the assets and the investments and must exercise that authority for the benefit of the beneficiary.
12b-1 distribution fees
A fee paid directly from the assets of a mutual fund to reimburse the mutual fund company for marketing and distribution expenses.
Securities Issued by State Farm VP Management Corp. For more information, call 1-800-447-4930.
Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.
When rolling over a 401 (k) into an IRA it's important to do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.
A 10 percent tax penalty may apply for withdrawals from tax-qualified products before age 59½.
Neither State Farm nor its agents provide investment, tax, or legal advice.
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