Skip to main content

Dear Dagen: A Glossary of Fund Terms, Part 2

Another guided tour through the jargon of mutual fund literature, this time with a focus on sales terms.

The mutual fund industry seems utterly devoted to awkward, legalistic terminology. Commissions are known as loads. Marketing charges are known as 12b-1 fees.

Investors need to know these terms by heart when wading through mutual fund literature. Last week, I offered a

glossary of terms used to describe mutual fund management and investing styles. The following is another glossary, this one of terms you'll encounter when buying, selling or even researching a fund.

Open-End Fund

Mutual funds that issue and redeem shares on demand. These funds typically have an unlimited number of shares available for purchase. The price is based on the fund's net asset value. Think






. Most U.S. mutual funds fall into this category.

Net Asset Value

A fund's net asset value, or NAV, is the dollar value of a single share, based on the value of all the fund's holdings, minus liabilities, divided by the number of shares outstanding. This is the price you pay when you buy fund shares.

Closed-End Fund

These funds sell a fixed number of shares and invest the proceeds in securities, often bonds or stocks of a specific country. Shares of these funds trade like stocks on exchanges such as the

New York Stock Exchange

. Closed-end funds can have a fixed life, but most trade in perpetuity. Low demand can cause closed-end shares to trade at a discount to the value of the fund's assets. In fact, 77% of U.S. closed-end funds trade at a discount to their net asset value, according to data provider



Scroll to Continue

TheStreet Recommends

Unit Investment Trust

This is a fixed portfolio of securities, often with a theme or common objective, such as Internet stocks or real estate. UITs have a finite life and predetermined expiration date, ranging from a few years for an equity UIT to 20 to 30 years for a municipal bond UIT. Shares in a UIT are usually sold by brokers during a set offering period, but investors can usually take their money out before the portfolio reaches its maturity or expiration date.

Exchange-Traded Funds

Technically, closed-end funds are exchange-traded. But the newer definition applies to an increasingly popular breed of security that trades on the

American Stock Exchange

. These are securities that give investors ownership in a specific basket of stocks, often tracking an index. Best-known example:

Standard & Poor's Depositary Receipts


, commonly referred to as Spiders, or SPDRs, which track the performance of the

S&P 500

. The most recognizable benefit of these securities is that you can trade them throughout the course of each trading day, unlike most mutual fund shares, which are priced once a day at the close of trading.


Loads are sales charges, or commissions, that investors are charged when they buy certain funds. Load funds are typically sold through intermediaries, like brokers or advisers, and these commissions are used to pay the broker or adviser who sold the fund. Funds that don't carry these sales charges are called no-load funds. Loads come in three flavors: front-end, usually 5% to 5.75%, paid when shares are purchased; back-end, paid when shares are sold, usually in amounts that decrease over time; and level, paid annually for the life of the investment.

Low-Load Funds

You might come across this term when someone is trying to talk you into buying a fund that carries a sales commission. "But this one carries a low load!" A low-load fund will carry a front-end charge in the 2%-to-3% range. Some so-called no-load companies charge these low loads, meaning that you pay a sales commission but don't get the advice that normally comes with a load fund. Fidelity, for example, charges 3% loads on many funds sold directly to investors, including


New Millennium,


Contrafund II and its Select funds.

12b-1 Fees

Both load and no-load funds can charge 12b-1 fees. These annual fees cover advertising and marketing costs and commissions paid to brokers. These fees are included in the annual expense ratio of a fund. For a fund to be called a no-load fund, its 12b-1 fee cannot exceed 0.25%.


Every year, mutual funds are required to pass all gains (minus losses) from the sale of securities, as well as dividends they have earned, on to shareholders. A fund can make a distribution at any time during the year or can make multiple distributions. Often, a fund's big capital gains distribution happens toward the end of the calendar year. These distributions can shock investors because they reduce a fund's net asset value by the amount distributed. But if the distribution is reinvested in shares of the fund, the net effect to the shareholder is a wash. However, the distributions typically are taxable, unless the fund is held in a tax-deferred account.

Statement of Additional Information

The SAI, as it's commonly known, includes some interesting details about the operation of a mutual fund, such as who is on the fund's board and what they get paid, specific investment restrictions that can only be changed with shareholder approval and details of the risk that the fund is allowed to take. Unlike more common fund documents, such as the prospectus and the annual and semiannual reports, the SAI is not regularly distributed to shareholders. Fund companies are only required to provide it upon request.

Are there other terms you'd like to see in a future glossary column? Send them to me at And, as always, please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.