Understanding 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 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 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 finance however, the mutual fund term alpha has nothing to do with the Greeks. 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 you invest in, pay close attention to the alpha of your investment and make sure that it stays higher than 1.

Beta

Again, this term has nothing to do with the Greek alphabet. 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.

Richard Henderson runs his own internet marketing business from home. Check out these great Mutual Funds tips and articles or the more specific Mutual Funds Comparison articles and guides - http://www.mutualfundscomparison.com