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5. R-Squared
R-squared measures a fund's movements against its particular benchmark
index on a scale ranging from 1 to 100. An S&P 500 index fund
will have an R-squared very close to 100 because the fund mirrors
the index. A fund with a low R-squared number is moving out of sync
with its index.
A high R-squared means the beta on a fund is actually
a useful measurement. A low R-squared means ignore the beta.
6. Load
Loads are sales fees. Most common are front-end loads and
back-end loads. Let's say you invest $5,000 in a fund with
a front-end load of 5 percent. Automatically you pay $250 and your
investment is cut to $4,750. If you are in a fund with a back-end
load, you'll be hit with a sales fee when you sell your shares.
Some funds claim to be "no load" but charge reinvestment fees
when distributions are reinvested in a fund.
If you're a do-it-yourself investor, avoid funds that
charge loads. No-load funds generally outperform load funds for
the simple reason that the sales fee adds to the cost -- and therefore
lower returns.
7. Redemption fee
A redemption fee is charged when you withdraw money from a fund.
It's different from a back-end load in that a redemption fee goes
back into the fund while a back-end load profits the fund company.
Some funds will charge you both! A redemption fee is typically charged
only if you withdraw your money before a set period. This is done
to discourage investors from constantly moving money in and out
of funds.
However, some funds waive the redemption fee when
you move your money from one fund to another in the same family.
Adding to the confusion, some stocks in a family may have a redemption
fee while others don't. Finally, some families of funds charge an
exchange fee when you shift money from one fund to another.
Ask about this before you invest in a fund.
8. Contingent deferred sales
load
A contingent deferred sales load is charged by some mutual funds
to customers who sell their shares within five or six years of making
their investment. Some funds charge a 6 percent penalty if you withdraw
in the first year, 5 percent if you leave in the second year, and
so on.
Some companies base their contingent load not on your
original investment but on the amount you have in the fund when
you withdraw.
If you're thinking of investing in a fund, ask if
they have a contingent deferred sales load. If they do and you might
need your money before the time limit is up, don't invest in that
fund.
9. Net Asset Value
Commonly written as NAV, Net Asset Value is the current dollar value
of a single share in a mutual fund. It's the fund's assets minus
its liabilities divided by the number of outstanding shares. A fund's
NAV is calculated at the end of each business day.
You can track a fund's NAV like you would the price
of an individual stock. If the NAV goes down over time, it's bad;
if it goes up, it's good.
10. Turnover
Turnover is a measure of a fund's trading activity based on the
number of times a year that an average dollar of assets is reinvested.
If a fund has $100 million in assets and sells $50 million worth
of securities, the turnover ratio is 50 percent.
High turnover can lead to high tax bills, which take
a big bite out of your bottom line, unless the mutual fund is in
your IRA (and therefore tax-exempt). If your investment is taxable,
look for tax-efficient funds.
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