Glossary

• 12b-1 Distribution Fees

  A fee, paid directly from the assets of a mutual fund, to reimburse the broker-dealer for certain marketing and distribution expenses. It is included in the fund’s expense ratio.

• 401 (k)

  A defined contribution plan offered by a company to its employees that allows them to defer income for retirement. In some cases, employers will match employee contributions. Taking a distribution of the funds before a certain specified age will trigger a penalty tax.

• 1099-B

  Internal Revenue Service (IRS) form that reports proceeds from redemptions (sales and exchanges). This form helps determine the gains and losses on the sales and exchanges made during the year. This form will be updated to include the cost basis information including long- term and short-term gains. The IRS has extended the due date to furnish 1099-B forms to taxpayers from January 31st to February 15th.

• Adjusted Cost Basis

  The adjusted cost basis calculation required by the IRS includes adjustments made to the account for events like wash sales.

• Average Cost Basis Method

  A common accounting method for valuing the cost of shares in a mutual fund account. It is calculated by dividing the total cost of all shares owned by the total number of shares.  The basis of the shares redeemed is determined by multiplying the shares redeemed by the average cost per share.

• Assets

  Any item of economic value owned by a person or entity. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities and an owner’s equity.

• Asset Allocation

  The process of spreading your assets among different types of investments, such as stocks, bonds, cash, etc.

• Asset Class

  A type of investment, such as stocks, bonds, real estate, or cash.

• Balanced Investment Strategy

  A portfolio allocation strategy designed to provide both income and an increase in the value of the portfolio (capital appreciation) while avoiding excessive risk.

• Bond Investment Risk

  The risk that is associated with investing in bonds. Although these risks include short-term and prolonged price declines, such price declines in the bond market have historically been less severe than stock declines.

• Beneficiary

  An individual, institution, trustee, or estate that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract, upon the death of a certain person.

• Bonds

  Debt securities or investments that essentially loan funds to a government or business for a certain period of time. Generally, the principal along with interest is paid back to the investor on a specified date(s). It’s often secured and has priority over shareholders if the company becomes insolvent and assets are distributed.

• C- Corporation (C-Corp)

  A business that is legally and completely separate from its owners to limit the owners’ liabilities. Most publicly-traded companies fall under this classification. In the U.S., a C-Corporation is required to pay taxes on its income. Dividends to shareholders are also taxed (double-taxation).

• Call Risk

  Call risk is the danger that during periods of falling interest rates, a bond issuer will "call", or repay, its bonds with higher interest yields before the maturity date of the bond. If this happens, the fund may have to reinvest the proceeds in an investment that provides a lower yield than the called bond.

• Capital Gains Distributions

  Distributions (usually annually) paid to mutual fund shareholders from gains realized on the sale of portfolio securities.

• Capital Gain

  The profit realized when a capital asset is sold for a higher price than the purchase price.

• Capital Loss

  Loss incurred when a capital asset is sold for a lower price than the purchase price.

• Credit Risk

  The risk that the issuer of the security fails to make principal or interest payments when due, or that the credit quality of the issuer falls.

• Cost Basis

  Term that refers to identifying the actual cost of an asset or security for income tax purposes. In Non-Tax Qualified accounts, the investor has already paid taxes on the money invested (including reinvested dividends and capital gains). When shares are sold, the cost basis represents a return of capital and is not taxed again.

• Cost Basis Accounting Method

  A specific process used to determine the cost basis of a shareholder’s account.  Different methods can produce different cost bases, which can result in different gain/loss calculations.  State Farm Mutual Funds offers cost basis accounting methods.

• Covered Shares

  Shares purchased/obtained on or after January 1, 2012 that require cost basis and gain/loss reporting to both the shareholder and to the IRS.  Also known as Post-effective Date Shares.

• Custodial Account

  An account that is administered by a person or entity (the custodian) for the benefit of another person. Accounts are usually at a bank, mutual fund, or brokerage.

• Custodian

  A bank or trust company that oversees a mutual fund’s assets, including its portfolio of securities or some record of them. The custodian has no role in portfolio management.

• Debt Financing

  Obtaining funding by selling bonds, bills, or notes to individuals or institutions.

• Default Accounting Method

  When the shareholder has not affirmatively elected an accounting cost basis method, the broker or transfer agent’s default cost basis method will be used.  State Farm Mutual Funds'default method is the average cost method.  Also known as Fund Default Accounting Method.

• Direct Rollover

  A tax-free movement of funds from a qualified plan (e.g. 401k) to another qualified plan/IRA. A check would be made payable to the receiving custodian for the benefit of the shareowner. In some instances, the check could be mailed to the shareowner’s address.

• Distributions

  Payment in the form of dividends or capital gains of the portfolio. Distributions may be paid in cash or reinvested to purchase additional shares.

• Diversification

  A method of portfolio asset allocation that spreads investments over a broad range of securities and/or asset classes. The goal of diversification is to reduce risk exposure to a specific security, sector, or asset class by, balancing the portfolio’s risk and return potential.

• Dividend

  A distribution of cash from a fund’s net income to its shareowners. Dividends can be reinvested to purchase additional shares.

• EAFE® Free Index

  An index that tracks the performance of companies in Europe, Australia, New Zealand, and the Far East.

• Eligible Rollover Distribution

  Distribution from a qualified retirement plan that is eligible to be rolled into another retirement plan/IRA.

  A qualifying event must occur to be eligible. Qualifying events include, but are not limited to:

  • separation from service
  • disability
  • death – (spouse is beneficiary)
  • a qualified domestic relations order (QDRO)

• Exchange

  The sale of shares in one fund to purchase shares in another fund.

• First In, First Out (FIFO) Method

  An accounting method for valuing the cost of shares sold in an account that assumes shares acquired first (i.e. the oldest shares) are the first shares redeemed when determining the shareholder's cost basis, gain/loss and holding period.

• Foreign Investing Risk

  Investing in foreign securities involves higher trading and custody costs than investing in U.S. companies. Accounting, legal, and reporting practices may be different than in the U.S., and regulation is often less strict. Potential political or economical instability presents risks, as does the fluctuation in currency exchange rates and the possible burden of exchange control regulation or currency restrictions that could prevent the conversion of local currencies into U.S. dollars.

• Gain

  An increase in the value of shares that results in a higher worth than the purchase price. A gain is not realized until shares are sold. Also known as Capital Gains, this should not be confused with the capital gains that are reinvesting into a shareholder's account or paid in cash to a shareholder at the Fund level.

• High Cost, First Out (HIFO)

  An accounting method for valuing the cost of shares sold in an account that assumes shares that were purchased for the highest price of all owned shares are the first shares redeemed when determining the shareholder's cost basis, gain/loss and holding period.

• Holding Period

  The length of time a share is owned, beginning on the day after it is acquired and ending on the day it is disposed of. The law currently provides for two holding periods:  short-term and long-term.  Short term describes shares held exactly 12 months or less.  Long-term describes shares held more than 12 months.

• Income Risk

  The risk that the income from a fund’s investments will decline because of falling market interest rates.

• Index

  A measurement of the price performance of a group of securities that serves as a benchmark against which performance is measured. An index is not a mutual fund, and you can’t invest in an index.

• Indexing Risk

  This is the risk that an index fund won’t be able to track the performance of the benchmark index. Even when stock prices are falling, an index fund will stay fully invested and may decline more than the fund’s benchmark index. The composition and weighting of securities in an index can, and often does, change.

• Indirect Rollover

  A distribution from a qualified plan (e.g. 401k) or IRA into another IRA where a check is made payable from the surrendering custodian to the shareowner. The shareowner then has 60 days to roll the funds into an IRA.

• Inflation

  The overall general increase in the price of goods and services in an economy, usually measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar falls because a person won’t be able to purchase as much with that dollar as he or she previously could.

• Individual Retirement Account (IRA)

  A retirement account that allows an individual to set aside up to $5,000 per year (and an additional $1,000 for those 50 or older), with earnings tax deferred until withdrawals begin at age 59 1/2 or later.

• Interest Rate Risk

  The risk of a decline in market value of an interest-bearing instrument due to changes in interest rates. For example, a rise in interest rates typically will cause the value of a fixed-rate security to fall. On the other hand, a decrease in interest rates will cause the value of a fixed-rate security to increase.

• Last In, First Out (LIFO)

  An accounting method for valuing the cost of shares sold in an account that assumes shares acquired last (i.e. shares purchased most recently) are the first shares redeemed when determining the shareholder's cost basis, gain/loss and holding period.

• Liability

  A legal obligation, debt, claim, or potential loss.

• Liquidity

  Being easily converted to cash.

• Liquidity Risk

  The risk that the fund manager may have difficulty selling securities of a fund at a particular time and at the value the fund has placed on those securities.

• Long-term Gain

  Gains from the sale of shares that have been held longer than 12 months. When shares are sold for a price higher than what was paid for them, a gain results. Long-term gains are taxed at lower rates than short-term gains.

• Loss

  A decrease in the value of shares that results in a lower worth than the purchase price. A loss is not realized until shares are sold. Also known as Capital Losses.

• Loss/Gain Utilization (LGUT)

  An accounting method for valuing the cost of shares sold in an account that depletes losses before gains consistent with the objective of minimizing taxes. LGUT redeems in this order: short-term losses, long-term losses, long-term gains, and finally, short-term gains.

• Lot

  A group of shares of a similar kind that have a common set of characteristics, such as a number of shares owned by an account that were all acquired on the same day at the same price. Also known as a Tax Lot.

• Low Cost, First Out (LOFO)

  An accounting method for valuing the cost of shares sold in an account that assumes shares acquired with the lowest cost per share are the first shares depleted when determining the shareholder's cost basis, gain/loss and holding period.

• Management Fee

  A fee, paid directly from the assets of a mutual fund, to compensate the fund’s investment advisor for managing the fund’s investments.

• Management Risk

  The risk that the fund manager’s management of the fund may prove ineffective, resulting in losses or poor performance, even in a rising market.

• Market Risk

  The risk that share prices may fluctuate widely over periods of time in response to company, market, or economic news. Markets also tend to move in cycles, with periods of rising prices and periods of falling prices.

• Model Risk

  Risk that occurs when a model used to manage a fund’s assets does not perform as it should. Though the model may have been developed and refined over many years, there is no assurance that the recommended allocation will either maximize returns or minimize risks.

• Money Market Account

  Money market accounts are insured by the federal government and offer many of the same services as checking accounts, although transactions are somewhat more limited.  It can be a convenient place to store money and is highly liquid but may offer a lower interest rate than other investments.

• Money Market Fund

  Money market funds are different than money market accounts.  While money market accounts are insured by the federal government, investments in a money market fund are not guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.  These funds offer stability and an investment in the cash portion of an asset allocation program.  Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

• Mortgage-Backed Securities

  Mortgage-backed securities (MBS)are secured by a mortgage or a group of mortgages, most commonly on residential property. Essentially, an investor is lending money to an individual building a home or business.

• Municipal Bond Risk

  The risk that the value of a municipal security maydecrease because of changes in politics, taxation, and legislation. It also involves the risks associated with the conditions of economic sectors that municipal securities are normally issued for, such as education, health care, and transportation.

• Mutual Fund

  An investment that pools the money of many investors who have similar investment goals and invests that money in a number of securities on their behalf.

• Net Asset Value (NAV)

  The current price of a share - calculated daily by taking the value of the fund’s total assets, subtracting liabilities, and then dividing the balance by the number of outstanding shares.

• Paperless Legals

  A process which allows a customer to present securities transaction documents to an authorized guarantor who validates the good order of the document(s) and also guarantees that the signature of the customer is valid. This enables the transfer agent to accept the approval from the guarantor and reduces the amount of documentation needed to perform the transaction.

• Plan Administrator

  A plan administrator is the person or company who manages a plan and ensures that money is contributed into the fund, appropriate asset allocation decisions are made and payouts are promptly distributed to participants or beneficiaries.

• Portfolio

  A group of securities managed by a professional money manager who decides which securities to buy and sell in order to achieve the investment goal of the portfolio.

• Prepayment Risk

  The risk that homeowners or consumers may repay loans before they are due, which may affect the yield of mortgage- or asset-backed securities related to such loans.

• Rate Of Return

  The return on an investment calculated as a percentage of the total amount invested.

• Realized Vs. Unrealized Capital Gain (Or Loss)

  In general, a capital gain (or loss) is realized when the shareowner redeems (sells) or exchanges shares from his or her account for more (or less) than the purchase price. Unrealized gains (or losses) are reflected in the net asset value of the unredeemed shares in the account.

• Redemption

  The sale of mutual fund shares.

• Reinvested Dividends

  Dividends the shareowner reinvests purchasing additional shares in a mutual fund. These dividends are fully taxable and become part of the cost basis of shares held in the account.

• Rollover

  A tax-free movement of funds, depending on the type of rollover, from a qualified retirement plan into an IRA or other qualified plan within a time frame of 60 days (indirect) from one tax-qualified account to another (direct). Rollovers can happen when an employee leaves a job with an employer who offered a retirement plan such as a 401(k). (See “Direct Rollover” or “Indirect Rollover”)

• Roth IRA

  A type of IRA, established by the Taxpayer Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax free. Contributions are not tax deductible, but withdrawals, subject to certain rules, are not taxed at the federal level.

• Russell 2000® Index

  An index that tracks the performance of 2,000 small U.S. companies.

• S- Corporation (S-Corp)

  An S-Corporation is a regular corporation that has up to 100 shareholders. In general, S-Corps do not pay any federal income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

• Securities

  Any investment vehicle, including stocks, bonds, derivatives, and money market instruments.

• Shareholder Servicing Fees

  A fee, paid directly from the assets of a mutual fund, to reimburse the broker-dealer for certain expenses related to servicing shareholders’ accounts.

• Short-term Gain

  Gains from the sale of shares that have been held for less than 12 months. When shares are sold for a price higher than what was paid for them, a gain results. Short-term gains are taxed at higher rates than long-term gains.

• Short-Term Vs. Long-term Capital Gain (Or Loss)

  A short-term capital gain or loss is realized if the investment was owned for one year or less. A long-term capital gain or loss is realized if the investment was owned for more than one year. In general, a capital gain (or loss) is realized when the shareowner redeems (sells) or exchanges shares from his or her account for more (less) than the purchase price.

• Signature Guarantee

  A written representation signed by an officer or authorized employee of the guarantor, showing that the signature of a shareowner is genuine. A commercial bank, broker-dealer, or other authorized guarantor can provide this service. A notarized signature is not the same as a guaranteed signature and cannot be accepted.

• Smaller Company Size Risk

  The risk of investing in securities of small capitalization companies. These securities are often more difficult to value or dispose of, more difficult to obtain information about, and more volatile than stocks of larger, more established companies. In addition, the markets for the fund’s investments may not be actively traded, which increases the risk that the fund manager may have difficulty selling securities the fund holds.

• Specific Lot Identification (SLID)

  An accounting method for valuing the cost of shares sold in an account in which the shareholder designates specific shares to be redeemed each time shares are sold.

• Social Security

  The disability or retirement programs established under the federal Social Security Act.

• S&P 500® Index

  A unmanaged, weighted index of the average performance of 500 widely held common stocks. It is considered one of the more accurate measures of overall stock market performance because it includes approximately 75 percent of the market value of all publicly traded equities.

• Stock

  A security that represents ownership (called equity) in a corporation and represents a claim in its dividends and net assets. In a corporation with a single class of stock, ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he or she owns 5 percent of the company.

• Stock Investment Risk

  The risk of investing in stocks. These include both short-term and prolonged price declines.

• Uncovered Shares

  Shares purchased/obtained prior to the effective date (January 1, 2012) that do not require cost basis and gain loss reporting. Also known as Non-Covered Shares or Pre-effective Date Shares.

• Tax Deferral

  Delay of taxes on income until a later date. Examples of investment vehicles that allow an investor to defer taxes include IRA, 401(k), annuity, and employee-stock-ownership plans.

• Total Return

  The annualized rate of return for a mutual fund, including reinvested income from dividends and capital gains and the capital appreciation/depreciation of the securities within the fund's portfolio.

• Treasury Note

  A debt security issued by the U.S. government and backed by its full faith and credit, having a maturity of between two and ten years.

• Transfer

  A tax-free movement of funds from an IRA to another IRA. The shareowner does not receive the money, since the check is made payable to the receiving custodian for the benefit of the shareowner. In most cases the check is mailed directly to the receiving custodian.

• Trust

  A means for one person, called the trustee, to own and control property for the benefit of him/herself or another person, the beneficiary.

• Trustee

  The legal owner of trust assets who has authority over the assets and the investments and must exercise that authority for the benefit of the beneficiary.

• Wash Sale

  When selling shares at a loss, if substantially identical shares are purchased within 30 before or after the sale, it is considered a wash sale and no loss can be claimed.

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• 529 Plan

  A state-sponsored, tax-advantaged investment program designed to help save for future college education expenses. There are two types of 529 plans: prepaid tuition plans and college savings plans.

• 529 Prepaid Tuition Plans

  529 prepaid tuition plans allow an individual to buy all or part of a public in-state education at present-day prices. The value of the investment may be guaranteed by the state to meet or exceed annual college tuition inflation.

• Account Owner

  The individual or entity establishing an account or any successor of that individual or entity.

• Administrative Fee

  A charge for the administrative expense of a 529 plan, which may include services such as record keeping, auditing, and preparing statements and reports. The fee is deducted from your plan assets based on a percentage of your assets in the plan. You can find a description of the fees and expenses charged by a 529 College Savings Plan in the Enrollment Handbook.

• Annual Rate Of Return

  The return on an investment calculated as a percentage of the total amount invested.

• Code

  The Internal Revenue Code of 1986, as amended. It is the domestic part of the federal statutory tax law in the United States.

• Contingent Deferred Sales Charge (CDSC)

  A common type of sales charge investors pay when class B shares of some 529 plans and mutual funds are sold within a certain perios of time. The CDSC normally declines each year after the shares were originally purchased and is eliminated after a number of years.

• Coverdell Education Savings Account (ESA)

  A trust or custodial account in which contributions grow on a tax-deferred basis and withdrawals are tax free if used to pay for a variety of of educational expenses. Unlike 529 plans, ESAs have annual contribution limits and income restrictions.

• Custodial Account

  An account that’s created for the benefit of a minor, with an adult (bank, trust company, or other organization) serving as the custodian. The adult controls the funds until the child reachesa certain age, depending on the state law,, at which point the account transfers into the child’s name.

• Designated Beneficiary

  The individual designated by the account owner who will have qualified higher education expenses paid from the account. Anyone can be a designated beneficiary, including the account owner. A designated beneficiary can reside in the United States or abroad. You can open up more than one account for the same beneficiary, but you cannot have more than one beneficiary on the same account.

• Eligible Institutions Of Higher Education

  Accredited post-secondary educational institutions that offer credit towards a bachelor’s degree, an associate’s degree, a graduate-level or professional degree, or another recognized post-secondary credential, and are eligible to participate in certain federal student financial aid programs.

• Enrollment Handbook

  Similar to a mutual fund’s prospectus, a 529 College Savings Plan’s Enrollment Handbook (PDF 646 KB) provides detailed information about the plan, including investment options and fees and expenses.

• Enrollment-Based Portfolios

  A portfolio based on the number of years until the beneficiary is expected to attend college. The assets are invested in accordance with a target asset allocation.

• Equity Fund

  Mutual funds that invest mainly in stocks. Some equity funds may focus primarily on smaller, mid-sized, or larger corporations, or on specific market sectors. Also known as stock funds.

• Fixed-Income Funds

  Mutual funds that invest in bonds. Some fixed-income funds may focus primarily on short-term, intermediate-term, and long-term maturities. May also be known as bond funds.

• Gift Tax

  A tax on the transfer of property when one individual gives another something of value receives nothing, or less than the full value of the gift, in return.

• Internal Revenue Service (IRS)

  The Internal Revenue Service is the nation’s tax-collection agency and administers the Internal Revenue Code.

• Member Of The Family

  When changing the designated beneficiary, a “member of the family” of includes:

  • A son or daughter, or a descendant of either.
  • A stepson or stepdaughter.
  • A brother, sister, stepbrother, or stepsister.
  • A father or mother, or an ancestor of either.
  • A stepfather or stepmother.
  • A son or daughter of a brother or sister.
  • A brother or sister of the father or mother.
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
  • The spouse of the beneficiary or of any of the aforementioned individuals.
  • A first cousin.

  A legally adopted child of an individual shall be treated as a child by blood. The terms “brother” and “sister” include half-brothers and half-sisters.

• Non-Qualified Withdrawals

  Withdrawals from a college savings account used for non-college-related expenses. Non-qualified withdrawals are subject to federal income tax, applicable state income tax, and an additional 10 percent federal penalty tax on earnings.

• Qualified Higher Education Expenses

  Includes tuition, fees, books, supplies, and equipment required for a beneficiary's enrollment and attendance of at an eligible institution of higher education, Certain room and board expenses are also covered.. Qualified expenses include certain additional enrollment and attendant costs for beneficiaries with disabilites.

• Qualified Withdrawals

  Withdrawals from a college savings account used to pay qualified higher education expenses of the designated beneficiary. These withdrawals are tax free and cover expenses such as tuition, room and board (if the student is enrolled at least part-time), books, supplies, and other equipment.

• Rollover

  A tax-free movement of funds, depending on the type of rollover, from a qualified retirement plan into an IRA or other qualified plan within a time frame of 60 days (indirect) of from one tax-qualified account to another (direct). Rollovers can happen when an employee leaves a job with an employer who offered a reitrement plan such as 401(k). See "Direct Rollover" or "Indirect Rollover"

• Sales Charge (Front-End Load)

  The fee charged when you purchase shares in a 529 plan.

• Section 529

  Section 529 of the Internal Revenue Code specifies the requirements for qualified tuition programs (529 plans).

• Share Class/Unit Class

  A 529 College Savings Plan or mutual fund may offer more than one “class” of shares/units to investors interested in investing through an advisor. Each class has different fees and expenses.

• Static Portfolios

  A portfolio who investments remain the same and don't change based on the age of the beneficiary. Tthe assets are invested in accordance with a target asset allocation. Static portfolios feature the flexibility to choose from among several investment options that may align with your tolerance for risk, your time horizon, and other factors.

• Successor Account Owner

  The person the account owner assigns to own the account in the event of the current owner’s death or legal incapacity while there is still money in the account.

• Tax Deductible

  An expense or other item that can be deducted from annually reported income to reduce the amount of taxable income.

• Tax-Deferred Income

  Income that is not currently taxable but will be taxed in the future (e.g., when the income is distributed from the account).

• UGMA /UTMA (Uniform Gifts to Minors Act/Uniform Transfers to Minors Act) Accounts

  .A custodial account that allows an individual to invest for a child's education but is not limited to education savings purposes. If permission is given by the custodian, control over money in an UGMA/UTMA account automatically is transferred to the beneficiary when he or she reaches the age specified in the state’s UGMA\UTMA statute.

• Underlying Investment Expenses

  529 plan portfolios typically invest in a number of investments. The portfolios take on part of the fees and expenses of those securities, and the expense is expressed as a percentage of the plan’s assets. These fees are not directly paid, but are reflected within the portfolios daily unit value calculation. Underlying investment expenses include:

  1. Management Fees – These fees include amounts paid to the fund’s investment advisor for managing the portfolio and providing other services such as shareholder record keeping and preparing account owner statements and reports.
  2. 12b-1 Fees – Named after a Securities and Exchange Commission (SEC) rule, these fees include the cost of distributing the fund shares to investors.
  3. Other Expenses – These expenses include any other annual fund expenses.

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