Making Sense of Mutual Fund Lingo
S&P Capital IQ
The jargon of investing may seem designed to confuse, but understanding a few of the terms can help you navigate your way more easily through the maze of financial information.
The NAV -- or net asset value -- of a fund is the price to buy or sell one share of the fund. It is calculated on a regular basis by the fund company using the closing price of each security held in the fund. In some retirement plans, the actual unit value of shares may differ from the NAV.
Capital Appreciation (or depreciation) is the difference between the price (NAV) of your shares when you bought them and the current price. While maximizing capital appreciation is the objective of growth funds, money market mutual funds strive to maintain a constant NAV of $1, so they offer no opportunity for capital appreciation.
Yield is the interest earned or income generated by the fund as a percentage of its NAV. Although some equity funds may pay interest, yield is most relevant as a measurement for bond and money market funds that have income as their primary objective.
Total Return is calculated as a percentage change in the fund's NAV, plus any other income. It represents the gain -- or loss -- of any fund over time, assuming that all distributions by the fund have been reinvested. It may be useful to compare your fund's total return to an appropriate benchmark index as well as to other mutual funds with similar investment objectives.
When the securities in a fund pay interest or dividends, the fund passes them along to its shareholders. In the same way, any capital gains -- or profit -- realized by the sale of a security in the fund are distributed as well. Through your retirement plan, these dividend and capital gains distributions are automatically reinvested in the fund to foster long-term growth. You receive additional shares (or fraction of a share) rather than cash.
Taking the time to decipher the language of investing can be an important step toward taking control of your financial future.