401(k) Plan: A retirement plan that allows employees to contribute a percentage of their pretax salary to a tax-deferred account. Employers often match contributions to encourage employees to participate.
403(b) Plan: A retirement plan that allows employees of nonprofit organizations to contribute a percentage of their pretax salary to a tax-deferred account. Employers often match contributions to encourage employees to participate. Sit Mutual Funds no longer offers 403(b) retirement plan accounts.
12b-1 Fee: A fee used for distribution and marketing expenses of a mutual fund. The Sit “S” class funds are charged a 12b-1 fee of 25bp.
Alternative Minimum Tax (AMT): A federal income tax that is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold.
Asset Allocation: The mix of asset classes in which an individual’s funds are invested. The most common classes include equity, fixed-income investments, foreign securities, real estate and cash.
Automated Clearing House (ACH): An electronic funds transfer system. The ACH system is run by the National Automated Clearing House Association. Bank instructions must be established prior to using the ACH system. Purchases of shares can be made directly from and redemptions can be sent directly to the bank account that has been set up. Transactions takes 2-3 business days to be completed. There is no fee associated with ACH transactions.
Automatic Investment Plan (AIP): A program allowing mutual fund investors to purchase shares periodically through automatic transfers from the individual’s checking or savings account.
Back-End Load or Contingent Deferred Sales Charge (CDSC): A fee paid upon the redemption of shares in a mutual fund. The size of the fee usually decreases to zero over time and is generally associated with class B shares. Many mutual fund companies use a contingent deferred sales charge to discourage short-term trading.
Basis Point: One basis point equals 1/100 of 1%; 100 basis points equal 1%.
Benchmark: An index or other standard used to compare the relative performance of a mutual fund.
Beneficiary: A person or entity designated to receive a predetermined portion of an individual’s account upon death of the account owner.
Bond: A debt instrument issued by a corporation, government, government agency or municipality. The issuer receives the face amount (the amount borrowed) upon issuance and agrees to repay the amount at a specified date. To compensate the lender, the issuer pays periodic interest payments based on the bond’s coupon rate.
Capital Gain: An increase in value of an asset in which the market value is higher than its cost. Upon sale of the asset, taxes will be owed on the amount in which the sale price exceeds the cost.
Capital Gains Distribution: A payment made to all shareholders of a mutual fund on a predetermined date. The payment consists of capital gains generated by the mutual fund from selling individual holdings at a price higher than cost. The distribution is taxable, although most shareholders elect to have it reinvested in the fund.
Common Stock: Shares of common stock represent proportionate ownership in a publicly owned company. Shareholders vote on matters concerning the company, including the election of directors, and have residual claim on all earnings and assets.
Consumer Price Index (CPI): The Consumer Price Index measures the cost of a fixed basket of goods and services purchased by the average consumer. Inflation, the decrease in purchasing power over time, is determined by the rate of change in the CPI.
Cost Basis: The original price of an investment adjusted for dividends. The cost basis is used to determine tax liability due on capital gains and losses.
Coupon Rate: The fixed interest rate paid by the issuer of a bond to the lender quoted as a percentage of the face value. The issuer of a bond with a face value of $1,000 and a coupon rate of 10% will pay $100 to the lender each year until maturity.
Credit Rating: A rating assigned to a debt issuer by a nationally recognized, independent rating firm that reflects the firm’s opinion concerning the ability of the issuer to meet its debt obligations. The most common rating firms are Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.
Defined Benefit Plan: A tax-deferred pension plan in which the participants know in advance how much their benefit will be. The amount of the benefit is generally based on years of service and salary.
Defined Contribution Plan: A tax-deferred retirement plan that provides a benefit based on the contributions of the participant and any gains, losses or income by the account. A 401(k) is an example of a defined contribution plan.
Diversification: An investment strategy in which an individual allocates funds to different asset classes in order to reduce risk because it is unlikely that different assets will move in the same direction at the same time.
Dividend: A distribution of income to the fund’s shareholders. Dividends are taxable in the year they are received whether the distribution is reinvested or taken in cash. Qualified dividends are taxed at a maximum rate of twenty percent. Dividends received in a tax-deferred account are nontaxable.
Dollar Cost Averaging: An investment strategy that involves making regularly scheduled investments regardless of the direction of the market. More shares will be purchased when the price is low and less shares will be purchased when the price is high.
Duration: A measure which reflects estimated price sensitivity to given changes in interest rates. For example, for an interest rate change of +1.0%, a portfolio with a duration of 5 years would be expected to experience a price decline of 5.0%.
ESG: ESG is an acronym for Environmental, Social and Governance Criteria — a set of standards for a company’s operations used to screen investments by investors, socially responsible mutual funds, and exchange-traded funds. Environmental criteria addresses how a company performs as a steward of the natural environment. Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights.
Expense Ratio: The annual fee paid by shareholders for mutual fund expenses, including management fees, 12b-1 fees, and other operating costs. Different types of funds generally have different expense ratios, so investors must compare a specific fund to its industry average.
Federal Reserve Board: The seven-member Board of Governors that oversees Federal Reserve Banks, sets interest rates and monitors the economic health of the country.
Fixed-Income Fund: A mutual fund that invests in bonds and other fixed-income securities to provide shareholders with current income and to preserve capital.
Front-End Load: A sales charge applied to the initial purchase of a mutual fund.
Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final goods and services produced within an economy over a period of time. Changes in GDP, adjusted for inflation, determine the growth rate of the economy.
Growth Fund: A mutual fund that seeks to provide shareholders with growth of capital by investing in companies with a history of rapidly growing earnings.
Individual Retirement Account (IRA): A tax-deferred retirement account for individual investors. Earnings are tax-deferred until withdrawn after the age of 59 1/2. For investors who choose a Roth IRA, earnings are tax-free when withdrawn after the age of 59 1/2 and have had the IRA for at least 5 years. Contributions to a Traditional IRA may be tax-deductible depending on income and retirement plan participation.
Inflation: The decrease in the purchasing power of money over time. The rate of Inflation generally increases when the economy is flourishing and decreases during recessions.
Liquidity: The ability to access funds or buy/sell an asset easily without significantly affecting the asset’s price. Checking and savings accounts offer high liquidity, while a certificate of deposit is less liquid due to the penalties paid if funds are withdrawn early.
Load: A sales charge applied to the purchase of a mutual fund. Load funds are typically sold through brokers and financial advisors. A front-end load is a commission applied to the purchase of mutual fund shares, while a back-end load is a commission applied to the redemption of mutual fund shares.
Management Fee: A charge paid to a mutual fund’s investment advisor for its services. The annual fee is included in the fund’s expense ratio.
Money Market Mutual Fund: A mutual fund that invests in short-term securities such as treasury bills, commercial paper, negotiable certificates of deposit and banker’s acceptances and other highly liquid, low-risk securities. Money market mutual funds typically carry an NAV of one dollar (which isn’t guaranteed), and pay a monthly dividend.
Municipal Bond: A bond issued by a state, city or local government to finance operations or special projects such as construction of public facilities. Interest on municipal bonds is often free of federal income taxes and/or state and local income taxes.
Net Assets: The total value of all assets held by a mutual fund minus its liabilities.
Net Asset Value (NAV): The price at which mutual fund transactions are conducted. Open-end mutual funds calculate the NAV at the close of the New York Stock Exchange each day and all transactions entered for the day are processed once the NAV is determined. The NAV is calculated by dividing the net assets of the fund (assets minus liabilities) by the number of shares outstanding.
No-Load Fund: A mutual fund without a front-end or back-end load. No-load funds are sold directly from fund companies to shareholders, rather than through a financial advisor.
Plan Administrator: An entity or person assigned to manage a group’s retirement savings plan. The plan administrator is responsible for all decisions relating to the operation of the plan.
Profit-Sharing Plan: A type of defined contribution plan funded with discretionary employer contributions and often tied to company profits.
Prospectus: A legal document describing the objectives and risks of a mutual fund, as well as the background of fund managers and key financial data such as expenses and fund assets. It is designed to provide investors with the information they need to make an informed decision about investing in a mutual fund.
Redemption: The sale of mutual fund shares.
Rollover: A tax-free reinvestment of a distribution from a qualified company retirement plan such as a 401(k) into an IRA. The rollover must be within 60 days of the distribution to qualify. An IRA rollover allows these funds to continue to accumulate tax-deferred until they are withdrawn.
Roth IRA: A type of Individual Retirement Account (IRA), which allows funds to grow tax-free, subject to certain restrictions. Taxes are paid on contributions to a Roth IRA, but qualified withdrawals are tax-free. There is no requirement to begin taking distributions.
SEC Yield: A yield calculated using a standardized formula that was created by the Securities and Exchange Commission in an effort to make different mutual funds easier to compare. The yield is based on the income that the firm expects to receive based on the past 30 days.
Signature Guarantee: A stamp from a bank, credit union or broker-dealer that is a member of the National Association of Securities Dealers that guarantees the authenticity of a signature. A Medallion Signature Guarantee is the only guarantee accepted by Sit Mutual Funds. A notary public is not a substitute for a Medallion Signature Guarantee.
SIMPLE IRA: A plan for small organizations that allows employees to contribute on a pretax basis, and requires the employer to make either matching contributions or a nonelective contribution for all eligible employees.
Simplified Employee Pension (SEP) IRA: A retirement account for an employee of a small company in which contributions are made by the business owner on behalf of the employee.
Tax-Equivalent Yield: The yield before taxes that a taxable bond must offer to be equivalent to the tax-free yield of a municipal bond. The tax-equivalent yield depends on an investor’s tax bracket. The higher the tax bracket, the more attractive the tax-free income of a municipal bond becomes. The tax-equivalent yield is calculated by dividing the tax-free yield by one minus the investor’s tax rate. (Tax-Free Yield)/ (1-T)
Total Return: The percentage gain or loss made on an investment over a specified time period. The total return accounts for price appreciation/depreciation of the fund and dividends paid by the fund over the period. Dividends are assumed to be reinvested when received.
Traditional IRA: An Individual Retirement account in which funds grow tax-deferred until they are withdrawn. Contributions may or may not be tax-deductible and distributions taken before age 59 1/2 will be taxable and subject to a penalty. Distributions taken after age 59 1/2 will be taxable but not subject to a penalty. Distributions become mandatory when the account owner reaches the age of 70 1/2.
Transfer Agent: A company hired by a mutual fund to maintain shareholder records, process trades and distribute dividends.
Trust: An arrangement in which a grantor gives beneficial ownership of an asset to an individual (beneficiary), but gives legal control of the asset to another (trustee). A trust allows the grantor to gift an asset without relinquishing control.
Trustee: An individual or entity who manages assets for the benefit of another person. The trustee has a fiduciary duty to act in the best interest of the beneficiary at all times.
UGMA/UTMA : Uniform Gift to Minors Act or Uniform Transfers to Minors Act. An UGMA/UTMA account is a type of account in which a donor transfers ownership of an asset to a minor. A custodian is designated by the donor to oversee the account until the minor reaches the age of majority.
Wash Sale: A wash sale occurs when you sell shares for a loss and then buy back shares of the same security or one that is “substantially identical” within 30 days. If you have a wash sale, then you cannot take that loss against other gains or income to lower your taxes.
Wire Transfer: A wire transfer is an electronic transfer of funds conducted directly between two banks. Wire transfers are similar to ACH transactions, but differ in two important areas. First, funds from wire transfers are available quicker than ACH transactions. When a wire is sent, funds are available by the end of that same day at the receiving bank while funds sent via ACH will not be available until the following day. Second, wires often have a cost associated with the transaction. Sit Mutual Funds does not charge a fee for purchases made via a wire (however the bank sending the money may). Redemptions from Sit Mutual Funds with the proceeds delivered via wire will incur an $8 fee.