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Investment terms

Understanding your investments

Like many industries, finance has a specific language that people outside the industry may not be familiar with. We put together a list of some common investment terms you may encounter.

Actively managed funds

Funds managed by a portfolio manager based on their own judgment and experience. The manager typically buys and sells holdings frequently and regularly.


Measures the excess return of an investment relative to its benchmark index. An alpha of 1.0 means the investment has outperformed its benchmark by 1 percent. An alpha of -1.0 means the investment underperformed its benchmark by 1.0 percent.

Annual turnover ratio

The percentage of the investment’s holdings that have been replaced within a year. For example, a mutual fund investing in 50 stocks and replacing 30 stocks during one year has an annual turnover ratio of 60 percent.

Asset allocation

Dividing investment money among various asset classes, like stocks, bonds, and cash. Each asset class has different levels of risk and return. Over time, rebalancing your assets is necessary to maintain your intended allocation plan.

Benchmark index

An unmanaged group of securities—stocks or bonds—whose performance is used as a standard of investment performance. For example, Standard & Poor’s 500 index can be used to benchmark large cap mutual funds.


A measure of volatility and the risk of a security or portfolio in comparison to the market as a whole. A beta greater than 1.0 means it is more volatile than the market. A beta less than 1.0 means the security or portfolio is less volatile than the market.


A debt security that a business or government—lender or issuer—sells to investors in return for a variable or fixed rate of interest over a period of time. When an investor buys a bond, he or she is lending money to the issuer. The seller of the bond agrees to repay the principal amount of the loan over time or at maturity. Interest-bearing bonds pay interest periodically. See default and interest rate risk for more info.

Credit risk

The risk that a borrower will not be able to repay a loan and the lender loses out on the principal and interest of the loan.

Currency risk

The risk that results from the changes in price from one currency to another, also known as exchange-rate risk. Investments with holdings or business operations outside the United States are subject to the profits and losses resulting in unforeseen currency changes.

Country or region risk

Collection of risks that include political, exchange rate, economic, sovereign, and transfer risks associated with investing in a foreign country.

Default risk

Also known as counterparty risk, default risk is the chance that the issuer of a bond—the business or government lending money—will fail to make a scheduled interest or principal payment on time.


The act of investing money among a number of asset classes, in different industries, with different maturity dates, and in different geographic locations. By properly diversifying, an investor will generally reduce their overall risk, while potentially yielding similar or higher returns.

Equity investment

A principal asset class comprised of stocks. See stock for more info.

FDIC insured

An account that meets the requirements to be protected or insured by the Federal Depository Insurance Corporation (FDIC). To qualify for FDIC protection, money must be in a bank that is part of the FDIC program. If an account is not FDIC insured, it means there are no protections afforded by the FDIC if the financial institution fails. The FDIC protects account balances up to $250,000 per financial institution.

Fixed income investment

A principal asset class comprised mostly of bonds or other debt instruments. See bond for more info.

Guaranteed fund

An investment option offered only by life insurance companies that guarantees:

  • The principal invested will not decline in value as long as the contract remains in force.
  • A disclosed rate of interest will be paid on the principal invested for a stated period of time, usually one year.
  • The availability of monthly payments at retirement for the life of the participant, or the joint lives of the participant and his or her spouse.

Income risk

The risk that an income stream will decrease due to a change in the interest rates. This risk typically effects money markets and other short-term income investments, which are greatly affected by changes in short-term interest rates.

Interest rate risk

The risk that the value of a security will change because of an interest rate change. For example, the price of a bond declines when interest rates rise.

Loss of money

Investing in the stock and bond markets is not a guaranteed return of principal. Your ultimate return will vary based on the performance of the investments. If the market value of your investment is lower than your purchase cost, a loss can occur.

Management risk

Risk associated with ineffective, poor, or underperforming management, which hurts the value of your investment.

Market volatility risk

The risk or possibility that an investor could experience loss of money due to the negative performance of the financial markets.

Maturity or maturity date

The date when the bond issuer—lender—agrees to repay the last principal and interest amount to the bond buyer, also known as the investor or the bondholder.

Net expense ratio

The total percentage of the mutual fund’s assets devoted to managing the mutual fund. Fees include investment management costs, recordkeeping costs, custodial services, taxes, legal expenses, accounting, and audit fees. This expense is deducted from the mutual fund’s daily net asset value.

Net asset value (NAV)

The daily price per share of the mutual fund.

Passively managed

Funds that buy and sell holdings to mirror a specific index or benchmark. Typically, there is a smaller annual turnover ratio on passively managed funds.

Prepayment/Call risk

The risk associated with the early unscheduled prepayment of principal on a fixed income security. The prepayment has an impact on the expected cash flows of the investment resulting in varying yield to maturity.


The amount of money an individual contributes to an investment.

Principal risks

Types of risks that may negatively impact an investor’s principal value. Each investment is subjected to specific risks based on the type of investment. For example, fixed income investments are subjected to risks associated with credit, default, and interest rate changes, whereas equity investments may be impacted by the market fluctuations. Most investments have multiple principal risks that an investor should understand and expect prior to investing.

Separate account

A nonguaranteed investment option insurance companies offer to participants in qualified retirement plans. These accounts are professionally managed investments that can own mutual funds, stocks, bonds, and other securities. Investors and retirement plan participants buy and own units of a separate account, but do not own the underlying supporting assets.

Separate account fee

The fee used to cover the life insurance company’s administrative expenses associated with offering a separate account. The fee is typically based on the amount of assets invested in a retirement plan.

Sharpe Ratio

A measure for calculating the risk-adjusted rate of return of an investment. The higher the investment's Sharpe Ratio, the better the returns have been relative to the amount of additional risk it has taken on to achieve those returns.

Standard deviation

A metric used to evaluate an investment’s risk by determining the variance of an investment’s returns compared to its average return over time. The greater the variance of an investment’s returns from month to month, the greater its standard deviation number will be.

Stock or common stock

A financial instrument that indicates partial ownership of a corporation. Stockholders have indirect control over the management of the corporation by electing board members. Stockholders have a proportional right to share in the corporation’s assets and earnings.

Sub transfer agency fee (Sub T/A fee)

A sub T/A fee is a revenue sharing arrangement between the mutual fund company and a third party administrator or record keeper for maintaining participant documents and records.

Target retirement account

A diversified portfolio designed to provide a specific asset mix of stocks and bonds based on a future retirement date. As the investment approaches its target, the equity exposure is reduced and replaced by a higher fixed income allocation. By reallocating the equity exposure, the investment reduces the amount of risk and volatility as it nears retirement date.

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