Mutual Funds - FAQs

Mutual Funds - Frequently Asked Questions

What is a load?  A load is simply a sales commission that goes to the seller of the mutual fund shares.  A load does not go to anyone responsible fro managing the fund's assets and does not serve as an incentive for the fund manager to perform better.

What is NAV? The Net Asset Value, or "NAV", of a fund is the cumulative market value of the assets of the fund net of its liabilities.  The NAV per unit is simply the net value of assets divided by the number of units outstanding.

How often is the NAV calculated?  Mutual funds calulate, and publish, their NAV on a daily basis.

What is the difference between a closed-end fund and an open-end fund?  A closed-end fund has a fixed number of shares outstanding and is traded similar to stocks.  An open-end fund sells and redeems shares at anty time, directly to shareholders.

What's total return?  The total return of an investment is the percentage increase or decrease in its value over time.  A mutual fund's total return can help investors judge and compare it with other funds and market returns.

How is a "fund of funds" different from other mutual funds?  Most mutual funds are made up of stocks or bonds.  A "fund of funds" is an investment portfolio which consists of a diverse group of other mutual funds.

What is a socially responsible fund?  In addition to the usual investment goals, these funds restrict their investments to whatever they define as socially responsible.  Such criteria can include: avoiding alcohol, tobacco and gambling industries as well as preferring companies that treat their employees and the environment well.  Different socially responsible funds have different social and investment criteria.

Can I purchase mutual funds for my IRA account?  Yes, you can use mutual funds as your investment vehicle in your IRA account.  Check with your mutual fund company to see which options they have available.

What does the portfolio turnover ratio tell me?  The portfolio turnover ratio is the lower of purchases or sales of assets in the fund relative to the average net assets in the mutual fund for the year.

What is an AIP?  Many mutual funds will offer an automatic investment plan ("AIP") to their investors.  This allows the shareholder to work with their banking institution to set up periodic, automatic investments via electronic transfer of funds from their bank acount.  Check with your mutual fund company to see if they offer an AIP.

What is a prospectus?  A prospectus is a mutual fund document detailing specific information about the fund, which is required to be provided to shareholders annually.  In general, a prospectus contains descriptions of:

(1) fees, in a standardized format

(2) investment objective(s)

(3) some financaial data

(4) investment methods, risk description

(5) investment manager and compensation

(6) how to buy/sell shares

(7) dividend and capital gain distributions

(8) other services and service providers

What is a signature guarantee?  It is a confirmation by a financial institution that your signature is genuine and that the financial institution accepts liability for any forgery.  It is not the same as a notary public.

What are capital gain distributions?  A mutual fund may, in the process of trading, realize capital gains.  A capital gain is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the fund.  These gains must be distributed to shareholders.  Conversely, a capital loss arises if the proceeds form the sale of a capital asset are less than the purchase price.

Mutual Funds - Frequently Asked Questions; will return in future columns as the questions come in.  If you have a mutual fund question for us, please forward to jsandvik@duluthmn.com.

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