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Glossary of Financial Terms

Accumulation fund: a superannuation fund where the benefit received by the investor is determined by the contributions that have been invested and the investment earnings, less any fees and taxes.

Allocated pension or annuity: a retirement income investment where an individual invests their superannuation money and receives an income periodically. The value of the account depends on the investment earnings and the amount of income taken. The capital is accessible and the income is flexible. There is no guarantee that the income will be paid for life.

All Ordinaries Accumulation Index: a measurement of the average movements in share price of a selection of major Australian companies listed on the Australian Stock Exchange. It is an accumulation index, which means that it assumes that dividends have been reinvested.

Annuity: a regular income stream paid to an individual from a lump sum investment, usually for the purposes of retirement income.

Approved Deposit Fund (ADF): a concessionally taxed investment fund for superannuation monies. Similar to a superannuation fund, however an ADF can only accept ETPs (ie superannuation money) and cannot allow contributions. For this reason superannuation funds have become more popular.

Application: to apply for an investment in a unit trust or managed fund.

Appreciation: the increase in the value of an asset.

Asset allocation: a representation of how a portfolio is invested among the various available asset classes. For example, a balanced fund may have an asset allocation of 30% Australian shares, 25% international shares, 10% property, 20% fixed interest, 10% international fixed interest, 5% cash.

Asset classes: the range of financial securities, such as shares, fixed interest, property, cash and international investments.

Balanced fund: a type of managed fund whose investment strategy is to have, at all times, some proportion of its investments in all asset classes, creating a risk/return balance between different types of investments.

Benefit: in relation to superannuation, the entitlement to a lump sum, pension or annuity.

Blue chip shares: shares in well established companies that have shown ability to pay dividends in uncertain markets.

Brokerage: a fee charged by a financial adviser or stockbroker for a transaction. Sometimes also referred to as commission.

Capital gains/growth: occur when the market value of an investment increases.

Capital gains tax: a tax on the gains of an investment, payable only when the investment is sold or disposed of in some other way.

Cash: one of the asset classes. Coin and note currency in circulation and in deposit accounts and money market securities.

Cash Management Trust (CMT): a form of managed investment in which the primary investment is cash securities. While offering security, they can also offer a competitive rate of interest.

Commission: a fee paid to a financial adviser or stockbroker for a financial transaction or advice. Sometimes also referred to as brokerage.

Concessional component: superannuation benefits received before 1 July 1994 which relate to certain disablement, redundancy and approved early retirement benefits.

Constitution: formerly known as a trust deed, it is a document setting out the methods of application, investment and withdrawal of funds within a managed investment, unit trust or superannuation fund.

Consumer Price Index (CPI): an index measuring the prices of items of goods and services. Allows comparison of the relative cost of living over time, typically know as inflation.

Contributions: amounts of money placed into a fund.

Contribution fee: This is the fee for the initial and every subsequent investment you make into a fund.

Contributions Tax: tax applied to certain contributions to a superannuation fund.

Defined Benefit Fund: a superannuation fund which defines the member's retirement benefit as a multiple of their salary. The multiple is usually based on the member's period of service and is not linked to contributions made over the period of employment. The opposite to a defined contribution or accumulation fund.

Defined contribution fund: see accumulation fund.

Diversification: spreading an investment over a range of asset classes, sectors and regions with the aim of reducing risk. As the old saying goes "don't put all your eggs in one basket".

Eligible termination payment (ETP): used to describe money that is already in the superannuation environment. A payment from a superannuation fund, approved deposit fund or employer to a person upon resignation, retrenchment, disablement, death or retirement. Sometimes such payments can be taken in cash, at other times they must be rolled over.

Entry Price: the price per unit or share of an investment in which applications are made.

Exit price: the price at which an investor can withdraw their units from a fund or trust.

Financial adviser: an individual who is licensed to provide investment advice to others for a fee.

Fixed Interest securities: Fixed interest securities, including bonds, represent loans to borrowers, which could include governments, banks and companies. In return for the loan, the borrower generally pays a pre-determined rate of interest for an agreed term.

Fund: see managed investment.

Growth assets: a term given to assets such as shares and property which are expected to provide strong investment returns over the long term.

Growth fund: an investment fund which is predominantly invested in growth assets.

Income: regular payments from an investment derived from interest on cash or bonds, dividends on shares, or rent from properties.

Inflation: see consumer price index (CPI).

Invalidity component: Payments from a superannuation fund or employer made after 30 June 1994 for disability.

Investment: an asset purchased with the intention of producing capital growth or income, or both, for the owner.

Lifetime pension or annuity: a retirement income investment where an individual invests their superannuation or other money and receives an income periodically. The capital is not accessible, and there is little income flexibility. The payments are guaranteed to be made for the person's lifetime.

Liquidate: to sell an investment or to convert an investment into cash.

Listed security: a security which is bought and sold via an exchange, such as shares on the stock exchange.

Loss: occurs where the sale price of an asset is less than the initial cost.

Lump sum: a superannuation benefit taken in cash rather than being rolled over to a pension or annuity.

Lump sum tax: tax payable on a lump sum benefit payment from a superannuation fund.

Managed investment (or managed funds): a unit trust which allows investors to pool their money with that of other investors so that the fund can buy a wide range of investments. These investments are managed by a professional fund manager who makes the investment decisions.

Management Expense Ratio (MER): a ratio expressing the management, trustee and certain other expenses of a managed fund as a proportion of the net asset value of the fund.

Maximum Deductible Contribution (MDC): the maximum amount per annum allowed to be contributed into a superannuation fund for which a tax deduction is allowed. The limit is dependent on your age.

Money market: a market where short-term securities, such as promissory notes and bills of exchange, are traded. Securities in the money market all have terms of one year or less.

Net asset value: the value of a company, or managed fund, which is the assets less liabilities.

Pension: a regular income stream paid to an individual, either by the Government (such as an Age Pension) or from a superannuation fund.

Pooled investment: an investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf. Also known as a unit trust or managed investment.

Portfolio: the full range of an investor's, or managed fund's, investment holdings.

Post 1983 component: that part of a superannuation benefit that relates to employment service, or superannuation fund membership, since 30 June 1983.

Pre 1983 component: that part of a superannuation benefit that relates to employment service, or superannuation fund membership, before 1 July 1983.

Preservation: a requirement to retain superannuation benefits within the superannuation environment until a specified condition has been met. Under current laws most benefits are compulsorily preserved until a person has retired (between 55 and 60) or reached a certain age (65).

Product Disclosure Statement (PDS) A PDS is an offer document which sets out information including the features of the product, fees that apply, the benefits and risks of investing in the product, commissions that may affect returns, information about complaints handling and cooling off rights, and other information that might reasonably be expected to have a material influence on an investor's decision to invest.

Profit: occurs when an investment appreciates in value and is sold, or realised. Also known as a realised gain.

Property funds: in a managed investment the term property generally refers to investments in property securities - property trusts listed on the stock exchange. Funds which invest in property securities allow diversification by investing across a range of different property sectors such as commercial, office, industrial, hotel and retail properties. A property securities fund generally invests in property trusts that are listed on the sharemarket, or in property-related companies.

Prospectus: a legal document lodged with the Australian Securities and Investments Commission (ASIC) which details how the fund operates, outlining the nature of the fund(s), how to invest and what to expect from the investment. This will be replaced by a Product Disclosure Statement by 11 March 2004

Reasonable Benefit Limit (RBL): the maximum superannuation benefit a person can build up over their lifetime which is taxed on a concessional basis.

Redemption/redeem: to withdraw, or sell, an investment.

Return: the amount of money received from an investment each year. Can comprise income and/or capital growth and is expressed as a percentage.

Risk: the variability of returns. Generally, the higher the level of risk an investor is prepared to accept, the higher the potential return over time may be.

Rollover/rolling over: the transfer of an eligible termination payment within the superannuation environment between superannuation funds, or from a superannuation fund to a pension or annuity.

Salary sacrifice: an amount of pre-tax salary that an employee decides to contribute to super or allocate to a fringe benefit instead of taking it as cash salary.

Sector: a group of securities with common characteristics, such as resource sector companies or financial companies.

Shares: represents ownership in part of a company. When you buy a share in a company you become a joint owner of the business and share in the future of that business. Also known as an equity.

Spouse contribution: a contribution to a superannuation fund from a spouse. Taxation offsets may be able to be claimed for such contributions.

Superannuation: a tax effective means of putting aside money during your working life for use in retirement.

Superannuation fund: a concessionally taxed investment fund for superannuation monies. These funds can accept both ETPs and contributions. Generally balances cannot be withdrawn until retirement. These can be run by an employer as a company fund, a fund manager as a personal fund or can be self managed by an individual.

Surcharge: superannuation surcharge is a tax paid by high income earners on certain super contributions and employer paid ETPs.

Switching: transferring units between two funds in a unit trust. This may trigger a capital gain.

Tax rebate/offset: now known as tax offsets, an amount of money that reduces tax payable.

Testamentary Trust: is a trust established under a person’s will.

Trustee: a person or company appointed under the terms of the trust deed to hold the trust property for the beneficiaries and to make sure that the plan is operated in accordance with the trust deed.

Trust deed: see constitution.

Undeducted contributions: a term given to after-tax money invested in a superannuation fund, such as investing after-tax salary.

Unit price: the price for each unit of a unit trust. This is calculated by dividing the value of the assets of the trust by the number of units on issue to investors.

Units: a share of a unit trust or managed fund which represents an entitlement to the asset within the fund.

Unit trust: an investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf. Also known as a pooled investment or managed fund.

Vesting: relates to superannuation, an employee's entitlement to optional employer superannuation contributions. Vesting is usually expressed on a scale, for example for each year of service employees are entitled to a further 20% of optional employer contributions. This means that after five years of service an employee is entitled to 100% of these contributions if they leave the employer.

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