The total market value of the securities in a mutual fund's portfolio. Total assets or total net assets are also used to describe a fund's size. When it comes to the size of a mutual fund, bigger is not necessarily better. The key to a fund's investment quality, in terms of the amount of money under management, lies in the compatibility of a fund's asset size and its investment style.So-called "asset bloat" is not much of a problem for bond, index and money market funds, which generally operate in large market segments that are very liquid and are less affected by large block trading transactions. With these funds, bigger is actually better because expenses can be spread over more investment assets. However, if a managed stock fund gets flooded with new money, the investment managers may find it difficult to invest it in an efficient manner. As fund assets rise, the number of appropriate new stock prospects shrink and transaction costs increase, which makes maintaining the fund's investment style difficult.
A benchmark or point of reference chosen by an investment fund to measure correlation values such as beta, the coefficient of correlation "r" and the coefficient of determination "r2." These correlation values indicate the degree to which the fund's performance is related to its market (using the benchmark as a proxy for the market). A high correlation to its benchmark is generally considered to be favorable for the fund if their investment thesis closely follows the benchmark. The relevant benchmark for correlation values depends on the fund's investing mandate. For example, a large-cap US equity fund would usually use the S&P 500 as its benchmark for correlation values, while a large-cap Canadian equity fund would use the S&P/TSX Composite index as its benchmark.
The percentage of a fund's average net assets that is used to cover the annual operating expenses of managing a mutual fund before reimbursements are made to the fund by managers.Also known as the "gross expense ratio". A mutual fund's operating expenses include management fees, transaction costs and other business costs. Some of these expenses may be reimbursed by management. Reimbursed fees often include indirect fees such as transaction costs from dealing with other mutual funds, transaction costs associated with exchange traded funds, or the dividends paid out from a short position on an asset.Reimbursements also occur when a fund's expense ratio is limited. In capped funds, an expense limit is created to place a ceiling on the charges to the fund's shareholders. The limit is often expressed as a percentage and is a highlighted in the fund's prospectus.
An investment vehicle offered by certain institutions that guarantees the investor's initial capital investment from any losses. Even though these products prevent investors from losing their invested capital, they also limit the amount of return that investors can obtain if the investments appreciate. This is how the offering institutions can afford to guarantee the principal investment.
A ratio used to determine return relative to drawdown (downside) risk in a hedge fund. Calculated as: Generally speaking, the higher the Calmar ratio, the better. Some funds have high annual returns, but they also have extremely high drawdown risk. This ratio helps determine return on a downside risk-adjusted basis. Most people use data from the past three years.
In a family of multi-class mutual funds, the class that has a constant load structure throughout the life of the fund. The class C fund usually has a higher management expense ratio because of its lower load fee when compared to other mutual funds with different load structures in the same family. Not all fund companies follow this class structure. However, it is the prominent method of distinction.
For load mutual funds, the dollar amount for the purchase of the fund's shares that qualifies the investor for a reduced sales charge (load). The purchase may either be made in a lump sum or by staggering payments within a prescribed period of time. The latter form of investment purchase in a fund must be documented by a letter of intent. For example, suppose that an investor plans to invest $95,000 in a front-end load mutual fund and faces a sales charge of 6.25%, or $6,125. If a breakpoint of $100,000 exists with a lower sales charge of 5.5%, the investor should be advised to invest an additional $5,000. If the investor can add another $5,000 to the investment, he or she would benefit from a lower breakpoint sales charge of $5,500, or a savings of $625 on this transaction.Mutual funds are required to give a description of these breakpoints and the eligibility requirements in the fund prospectus. By reaching or surpassing a breakpoint, an investor will face a lower sales charge and save money. Any investor purchase of fund shares that occurs just below a breakpoint is considered unethical and in violation of NASD rules.
The sale of a mutual fund at a set dollar amount that allows the fundholder to move into a lower sales charge bracket. If, at the time of investment, an investor is unable to come up with the funds needed to qualify for the lower fee, he or she can sign a letter of intent promising to reach the total amount, or breakpoint, in a set time period.Any sales that occur just below a breakpoint are considered unethical and in violation of FINRA (formerly the NASD) rules. An example of a breakpoint sale would be when an investor plans to invest $95,000 in a front-load mutual fund and faces a charge of 6.25% or $6,125. If the investor is properly advised, he or she will be told that adding $5,000 for a total investment of $100,00 will qualify the sale fro a lower sales charge of 5.5%, or $5,500. This means that the investor will essentially have $5,625 more invested than the initial purchase plan due to the savings in sales charges.
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