Mutual Fund Terms: Understanding The Lingo Of Mutual Funds
Before you throw your hands up in the air in frustration because you cannot seem to figure out what all the mutual fund terms mean, let us go through some of the most common used mutual fund terms. Once you know the meaning of these terms, it will be a lot easier for you to understand what all those mutual fund consultants and financial managers are saying.
Expense Ratio
One of the most common mutual fund terms is expense ratio. What does it mean? Expense ratio simply means the cost to operate your fund. This includes administrative fees, management fees and other expenses related to fund operations. You will see the expense ratio in a form of percentage deducted from your earnings.
If you do not understand why a certain percentage is deducted from your earnings, ask you financial consultant or fund manager to explain to you the whole thing. It may be difficult for your fund manager to come up with an itemized list of expenses and their corresponding amount but he or she can give you a good idea of what fees were paid out of your earnings.
12b-1 Fee
The term "12b-1 fee" may sound weird to you but this mutual fund term is something that you should not forget when you invest in mutual funds. The 12b-1 fee pays for your promotion, distribution and marketing expenses. Actually, that weird sounding term was derived from the law which created this fee. What effect does 12b-1 fee on you mutual fund investment? The 12b-1 fee can lower your overall return so watch out for this one.
Alpha
You probable learned from school that alpha is the first letter of the Greek alphabet. In the area of mutual funds however, the mutual fund term alpha has nothing to do with the Greeks. In mutual funds, the term alpha is a measure of the different in the fund's real return and its projected or expected return.
For instance, a high alpha means that the fund is doing well and a low alpha is definite a cause for alarm. When we investment in mutual funds, pay close attention to the alpha of your investment and make sure that it stays higher than 1.
Beta
Again, this mutual fund term has nothing to do with the Greek alphabet. In mutual funds, beta represents the volatility of the funds. The beta is measured against the S7P 500 index. By nature, beta or the volatility of the funds can greatly affect the returns of your investment.
