12b-1 Fee
Promotion expenses such as advertising and public relations that are paid for by shareholders

Account minimum
The minimum amount a Fool must initially invest in a fund, typically between $1,000 and $10,000.

Administrative costs
Costs of record keeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund. The thriftiest funds can keep these costs below 0.20% of fund assets, while the ones who use engraved paper, colorful graphics, and phone answers with highfalutin' accents might fail to keep administrative costs below 0.40% of fund assets.

Average cost
One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, you determine the average price of all your shares, including those purchased with reinvested dividends and capital gains. That price becomes your cost basis.

Back-end load
Funds with back-end loads are sometimes called "B" shares. These funds impose a contingent deferred sales charge, or CDSC, which is paid at the time of redemption. This fee is generally much higher than a front-end load. The good news is that it declines incrementally to zero over time, and usually disappears in five to eight years. These funds charge 12b-1 fees, which are typically higher than for front-end load funds. These funds may convert "B" shares into "A" shares after the load period has expired.

Blended fund
These mutual funds are generally a combination of growth and value stocks.

Bond index funds
In the world of bond investing, we don't see any reason to go anywhere but a bond index fund. The top dog is the Vanguard Total Bond Market Fund (VBMFX), which mimics the Lehman Brothers Aggregate Bond Index. There are also short-, intermediate-, and long-term bond funds.

Capital gains
When the fund sells a stock, it incurs short-term and long-term capital gains or losses. Unlike a corporation, a mutual fund does not itself pay income taxes. By law, each year the fund must distribute that year's net investment income (the total of dividends and interest received less fund expenses) and net realized gain (gains less losses on securities sales) to the fund's shareholders. That means that you get to foot the taxes due on those gainsFor various reasons, actively managed mutual funds don't invest all the money at their disposal, but instead maintain cash balances of approximately 8%.

Disclosure of mutual fund after-tax returns
SEC rule requiring all mutual funds to state explicitly their after-tax returns in their prospectuses, starting February 15, 2002.

Dividends and interest
Throughout the year, most mutual funds will receive dividends and interest on the securities they own. If the total passes the fund's annual expenses, you get the rest. Even if you reinvest those dividends, you have to pay ordinary income taxes on that money. That is to be expected -- it's money you made.

Dow Jones Industrial Average
The Dow Jones Industrial Average is made up of 30 stocks. The index shares for the Dow 30 are commonly called Diamonds (NYSEMKT: DIA).

Expense ratio
The percentage of total assets used to pay for fund expenses.

First-in, first-out (FIFO)
One of three methods to determine the cost basis of the mutual fund shares you sell. Under FIFO, the first shares purchased are considered the first shares sold. This is the IRS's default method. Because these tend to be the lowest-priced shares, this method usually results in a higher gain. A higher gain means higher taxes.

Front-end load
Funds with front-end loads are sometimes called "A" shares -- though they don't always make the grade. These funds charge an initial sales commission that ranges from 2.0-8.5% of the investment. The fee may also apply to reinvestments of dividends, interest, and capital gains. These funds usually also charge a 12b-1 fee.

Fund assets
Amount of assets currently in the fund.

Fund name
The official name of the fund, i.e., Foolish Beat-the-Market Fund.

Funds or stocks that carry relatively high valuations, because rapid growth is expected.

Index Fund
A passively managed mutual fund that seeks to match the performance of a particular market index. Partially due to lower expenses, index funds outperform the majority of actively managed mutual funds.

Investment advisory fee or management fee
Money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1% annually of the fund's assets.

Larger companies worth $5 billion or more, like General Electric (NYSE: GE).

Level load
Funds with level loads are sometimes called "C" shares, and they deserve the poor grade. They do not charge a front-end or back-end load. These funds impose a high -- and ongoing -- 12b-1 fee each year. There's no getting away from the lofty annual fees. The longer you hold, the more it hurts. A no-load fund may not charge a 12b-1 fee that exceeds 0.25% per year. Any fund with no front-end or back-end load that charges a 12b-1 fee in excess of 0.25% is considered a level-load fund.

Load funds
Mutual funds that have a sales charge.

Management fee
Fee levied for management of the fund and/or shareholder administration services. Usually a fixed percentage of the total value of your fund that is assessed once a year.

Medium-size companies worth $1 billion to $5 billion, like Barnes & Noble (NYSE: BKS).

Morningstar style box
Morningstar has broken down the world of domestic mutual funds into small-, medium-, and large-cap funds and by objective -- growth, value, or blend. The Morningstar style box looks like a tic-tac-toe board, as such:

Once you know which "style box" a fund is in, you can compare it with the other mutual funds that are similarly classified, and in many cases to a relevant index fund.

No-load funds
Mutual funds that do not have a sales charge.

Performance (year)
Rate of return for any given year. Fools compare a fund's performance with that of the S&P 500 and other S&P index funds.

Every mutual fund issues a prospectus, which is written in the driest, most confusing, boring language possible. But, in essence, it will describe the investment style of the fund. It answers the following essential questions:

  1. How much is the fund going to make from managing your money?
  2. What kinds of returns has the fund delivered for investors in the past, and what does it generally invest in to achieve these results?

Redemption fee
Fee levied for selling shares of your index fund. Usually a fixed percentage of the total value of your fund.

Russell 2000
An index of 2,000 smaller-company stocks.

S&P 500
The Standard & Poor's 500 Index is usually considered the benchmark for U.S. equity performance. It represents 70% of all U.S. publicly traded companies. Part of the index's popularity is due to its close association with the largest mutual fund in the world, the Vanguard 500 Index Fund, and Spiders (NYSEMKT: SPY), the first exchange-traded fund (ETF).

Smaller companies worth $250 million to $1 billion, like Hot Topic (Nasdaq: HOTT).

Specific identification
One of three methods to determine the cost basis of the mutual fund shares you sell. Under this method, the shares sold are identified by specific purchase date. If you bought shares at different times, you can pick the ones you paid the most for and say that you sold them. That reduces the amount of your capital gain, but you get the same proceeds. This method requires accurate records. You also must notify your fund of the quantities and purchase dates of the shares to be sold. You should also get confirmation from the taxman.

S&P Depositary Receipts, otherwise known as "spiders," represent a single unit of ownership in the SPDR trust. Units of the trust are bought and sold like individual shares of stock and they trade on the American Stock Exchange under the ticker symbol SPY. As the SPDR trust is a pool of money managed to perfectly mimic the Standard & Poor's 500 Composite Stock Price Index, the price of a unit in the trust is always the current value of the S&P 500 divided by 10.

Statement of Additional Information (SAI)
Each fund also submits a Statement of Additional Information that can be obtained by contacting the investment company or by visiting the Securities and Exchange Commission's website. The SAI goes into much greater detail about many matters found in the prospectus, particularly the tax consequences of fund distributions but generally in a language that only a lawyer could love. If you think there's any chance you will want to sue your mutual fund company sometime down the road, be sure to read the SAI carefully since it's legally considered part of the prospectus.

Ticker symbol, i.e., VFINX for Vanguard Index 500 or PREIX for T. Rowe Price Equity index.

Measures how long a fund holds on to the stocks it buys. The longer a mutual fund holds on to a stock and the less trading the fund does, the lower the turnover will be. Since a fund incurs costs every time it buys and sells stocks (just like you do), the lower the turnover, the lower the transaction costs incurred by the fund -- and the lower the capital gains taxes. Ideally, Fools like to see funds that practice the "buy and hold" method of investing -- those funds are the most index-like. Funds that have a turnover of 100% are essentially buying a completely new set of companies every year. Turnover should ideally be substantially lower than the mutual fund average of about 80%. Index funds have turnover as low as 5%.

Stocks that carry relatively low valuations, because slower growth is expected.

Wilshire 5000
The Wilshire 5000 represents the entire U.S. market. (Foreign companies, even those traded on American exchanges, are excluded.) This is the benchmark for the Vanguard Total Stock Market Index Fund (VTSMX). In reality, there are over 7,000 publicly traded U.S. companies, but the "Wilshire 7,123," or whatever it is right now wouldn't sound as good.