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.
A measure of market-related risk. The beta of every index is 1.00, no matter how volatile the index is. A beta less than one means the portfolio is less volatile than the index. A beta higher than one indicates more volatility than the index.
Identification number assigned to every stock, corporate bond and municipal bond by the Committee on Uniform Securities Identification Procedures (CUSIP), which is established by the American Bankers Association.
Capital Gains Distribution.
Profits distributed to shareholders resulting from the sale of securities held in the fund's portfolio.
A contribution made to a Roth or Traditional IRA between January 1 and April 15 for the prior tax year is called a carry-back contribution.
Catch Up Contribution.
Individuals age 50 and older may make an additional contribution over the maximum annual limit to Traditional IRAs and Roth IRAs. The maximum catch up contribution limit is $1,000 for tax year 2011.
There are two definitions of commingling for IRA purposes. The first definition involves IRA assets being combined with assets from a different type of savings plan. Commingling of IRA assets with non-IRA assets is prohibited. The second definition involves IRA assets being combined with assets from another type of plan that is eligible to be rolled over to an IRA. This type of commingling is not prohibited; however, it may affect the tax options available for the qualified retirement plan assets that were commingled with the IRA assets.
Compensation typically includes base salary, commissions, bonuses, overtime and vacation pay. For self-employed individuals, compensation is based on net earnings from self-employment.
If all Primary Beneficiaries are deceased, the second-named person, estate, or trust will receive the proceeds of a retirement account upon the account owner's death.
A purchase into an IRA or other retirement plan for a particular tax year. Contributions are subject to annual limitations, depending on the type of contribution.
A conversion is a taxable movement of cash or other assets from a Traditional IRA to a Roth IRA. A conversion is a reportable transaction.
A statistical measure of how two securities move in relation to each other.
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.
A direct rollover is a means of moving an eligible rollover distribution directly from one eligible employer-sponsored retirement plan to another eligible employer-sponsored retirement plan or to an IRA. Since the participant does not have constructive receipt of the assets, federal income tax withholding is avoided.
The disclosure statement must explain in plain language the rules that govern an IRA. Anyone who opens an IRA must receive a current disclosure statement.
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Distributions taken from a Traditional or Roth IRA before age 59½ are called early distributions. Early distributions are usually subject to a 10% early distribution penalty, unless an exception applies.
Exchange-Traded Fund (ETF).
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
The amount of an IRA contribution exceeding the allowable limits is an excess contribution. If an excess contribution is not properly corrected, a 6% IRS penalty applies until corrected.
The fund's total annual operating expenses (including management fees, distribution (12b-1) fees and other expenses) expressed as a percentage of average net assets.
Fair Market Value.
The fair market value is the value of an IRA as of a certain date. The December 31 fair market value must be provided to each IRA holder and the IRS each year.
Family of Funds.
A group of mutual funds, each typically with its own investment objective, managed and distributed by the same company.
A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.
An asset that combines equity and debt features, allowing companies to protect against financial risks in securities transactions.
The date on which the fund commenced operations; "rolled over" to a new IRA within 60 days; differs from a transfer in that the money is sent to the participant and not the new trustee.
The goal that an investor and mutual fund pursue together (e.g., current income, long-term capital growth, etc.)
The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value and commodities. The approach typically involves a medium-term holding period and produces high volatility.
Net Asset Value (NAV).
The per share value of a mutual fund, found by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding. Mutual funds calculate their NAVs at least once daily.
A mutual fund whose shares are sold without a sales commission and without a 12b-1 fee of more than .25 percent per year.
A nondeductible contribution is a contribution made to a Traditional IRA and designated by a Traditional IRA holder as nondeductible either by choice or because of ineligibility to make a deductible contribution. A deduction is not taken for this contribution. If a nondeductible contribution is made, you must file a Form 8606 Nondeductible IRA's.
Non-correlated Investment Strategy.
Can be used by investors to neutralize, or counterbalance, the risk that one, or more, of the investments in a traditional portfolio of stocks and bonds falls in value.
Open-End Investment Company.
The legal name for a mutual fund, indicating that it stands ready to redeem (buy back) its shares from investors on any business day.
Business costs paid from a fund's assets before earnings are distributed to shareholders. These include management fees and 12b-1 fees and other expenses.
A specialist employed by a mutual fund's adviser to invest the fund's assets in accordance with predetermined investment objectives.
A measure of the trading activity in a fund's investment portfolio (how often securities are bought and sold by a fund). An indication of a fund's trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors).
The first person, estate, or trust named to receive the proceeds of a retirement account upon the account owner's death. See also Contingent Beneficiary.
Probate is a court process used to transfer property from a decedent to their named heirs in an estate.
A prohibited transaction is a transaction between a Traditional IRA, Roth IRA, Coverdell education savings account (ESA), SIMPLE IRA, or qualified retirement plan, or IRC Sec. 403(b) plan and a party in interest (referred to as a disqualified person) that is prohibited under IRC Sec. 4975. For IRAs, these actions include taking a loan from the Traditional IRA, Roth IRA, or SIMPLE IRA, pledging or assigning the Traditional IRA, Roth IRA, or SIMPLE IRA as security for a debt, investing Traditional IRA, Roth IRA, or SIMPLE IRA funds in collectibles, etc. For a qualified retirement plan or 403(b) plan, prohibited transactions include use of plan assets for the benefit of a disqualified person.
The official document that describes a mutual fund to prospective investors. The prospectus contains information required by the SEC, such as investment objectives and policies, risks, services and fees.
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.
A Roth IRA distribution is a qualified distribution if the distribution represents assets that satisfy the five-year waiting period (beginning with the first taxable year for which the Roth IRA holder made a contribution) and one of the following events occurs: attainment of age 59½, disability, the purchase of a first home, or death.
Qualified Retirement Plan.
A qualified retirement plan is one that has been approved by the IRS and generally gets preferential tax treatment. For example, employers can deduct plan contributions made on behalf of eligible employees on the business' tax return.
The return on an investment, less the reduction in its value as a result of inflation.
Realigning the proportions of assets in a portfolio as needed.
A recharacterization occurs when an individual makes a contribution to a Roth or Traditional IRA, and later moves either all or a portion of the original contribution or conversion amount, plus net income attributable (NIA), to another IRA on or before the individual's tax return due date (plus extensions) for the year for which the contribution/conversion was made. Recharacterizations are not taxable but are reported to the IRS.
A reconversion is a conversion of an amount from a Traditional IRA to a Roth IRA, where such amount had previously been converted and recharacterized.
The date on which a shareholder must officially own shares in order to be entitled to a dividend.
Fee charged to shareholders by a mutual fund when they sell shares within a specified period. The time limit and size of fee vary among funds. The fee is paid to the fund, not the fund's investment adviser. Its purpose is to protect long-term investors from short-term traders.
Redesignation (aka Carry-forward).
An individual who makes an excess contribution to a Traditional IRA for a given tax year may in some cases apply the contribution to the next tax year by means of redesignation. Redesignation does not dismiss the penalty, but allows the funds to be left in the IRA.
Repurchase Agreement (Repo).
A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future), it is a repo. For the party on the other end of the transaction (buying the security and agreeing to sell in the future), it is a reverse repurchase agreement.
Required Beginning Date (RBD).
The required beginning date is generally April 1 following the year a Traditional IRA holder reaches age 70½.
Required Minimum Distribution (RMD).
After a Traditional IRA holder reaches 70 ½, a minimum amount must be distributed from the IRA every year. The mandatory distribution is called required minimum distribution (RMD). An IRA holder must begin taking their RMD in the year they attain 70 ½. The IRA holder has the ability to delay the first year's RMD until April 1 following the year in which age 70 ½ is attained. This date is called the required beginning date, or RBD. All RMDs in subsequent years must be taken by December 31. If an IRA holder defers his/her first RMD, he/she is required to take two withdrawals in the same year to satisfy the first and second year's required minimum distributions.
To determine the RMD amount for 2011, divide the year end account balance of the IRA as of December 31, 2010 by the applicable distribution period. The applicable distribution period for each IRA holder, is a number that represents the average life expectancy remaining for an individual based on age and is determined by using IRS life expectancy tables.
Risk/Reward (or Return).
The relationship between the degree of risk associated with an investment and its return potential. Typically, the higher the potential return of an investment, the greater the risk.
A rollover is a tax-free, reportable movement of cash or other assets between IRAs, between retirement plans, or between IRAs and eligible employer-sponsored plans.
A type of IRA that can only receive nondeductible contributions. A Roth IRA holder may be entitled to tax-and penalty-free distributions, provided certain rules are met. A Roth IRA allows annual nondeductible contributions of the lesser of $5,000 ($6,000 if age 50 or older) or 100% of earned income or compensation for tax year 2011.
Simplified Employee Pension (SEP).
A Simplified Employee Pension plans (SEP) lets a self-employed person or business owner contribute up to 25% of annual earnings to a maximum contribution of $49,000 per year for each eligible employee for 2011. Contributions are tax deductible and earnings are tax deferred.
When IRA holders wish to name someone other than or in addition to his or her spouse as primary beneficiary of the IRA, spousal consent is generally required in states maintaining community or marital property laws.
Spousal IRA Contribution.
Spousal contributions are limited to the lesser of the annual maximum contribution limit or the couple's combined earned income less the amount contributed for the compensated spouse. To make a spousal contribution to a Traditional IRA, the IRA holder must be under age 70%, file a joint tax return with spouse and between the IRA holder and spouse have earned income. To make a spousal contribution to a Roth IRA, the IRA holder must file a joint tax return with spouse, have earned income between the IRA holder and spouse, and together with spouse have MAGI within the income limits.
The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.
Statement of Additional Information (SAI).
The supplementary document to a prospectus that contains more detailed information about a mutual fund; also known as "Part B" of the prospectus.
TIPS -Treasury inflation-protected securities (TIPS).
Securities in which the principal amount is adjusted for inflation and interest payments are applied to the inflation-adjusted principal.
Return on an investment over a specified period, including price appreciation (or depreciation) plus any reinvested income, expressed as an average annual compound of return.
The movement of a retirement account from one custodian directly to another. An asset transfer is not a distribution and is not taxable or reportable to the IRS.
The avoidance of substantial losses by adherence to investment strategies that are proven to mitigate risk while improving the consistency of returns. Examples of typical portfolio risks include business, financial, inflation and foreign exchange risks. Examples of effective risk mitigation strategies are actively managed diversification and hedging.
A measure of net income (dividends and interest) earned by the securities in the fund's portfolio less fund 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.