income fund: a mutual fund that seeks to provide current income for shareholders. Examples include bond funds and money market funds, which invest in corporate and government securities, and municipal bond funds, which invest in municipal securities that provide tax-free income. Equity-income funds seek income as their primary objective by investing in a mixture of stocks and bonds.
income stock: a stock paying relatively high and regular dividends. Industries known for income stocks include utilities, banks and insurance companies.
index: a statistical measure that shows changes in the economy or financial markets and serves as a benchmark against which economic and financial performance is measured. Examples include the Consumer Price Index and stock market indexes such as Standard & Poor’s 500 Composite IndexSM and the Russell 2000® Index, which are weighted by market capitalization. Distinct from an average, such as the price-weighted Dow Jones Industrial AverageSM, an arithmetic mean that is weighted and adjusted to represent market behavior.
Individual Retirement Account (IRA): a tax-deferred retirement account for individual investors. Earnings are tax-deferred (or tax-free, with a Roth IRA) until withdrawn. A 10% penalty generally applies to amounts withdrawn before age 59-1/2. Withdrawals from a traditional IRA must begin by age 70-1/2. Contributions may be deductible under certain circumstances, depending on income levels and retirement plan participation. See also SEP IRA and SIMPLE IRA.
Individual Retirement Account (IRA) rollover: a tax-free reinvestment of a distribution from a qualified company retirement plan such as a 401(k) into an IRA. The rollover must be within 60 days of receiving the distribution to qualify. This 60-day requirement may be waived by the IRS. An IRA rollover allows these funds to continue to accumulate tax-deferred until they are withdrawn.
inflation: the overall general upward price movement of goods and services in an economy, usually measured in the U.S. by the Consumer Price Index. Inflation is one of the major risks to investors over the long term because it erodes the purchasing power of their investments, especially slow-growing investments such as savings accounts and money market instruments.
interest rate: the rate of interest charged for the use of money, usually expressed at an annual rate. The rate is derived by dividing the amount of interest by the amount of principal borrowed. For example, if a bank charged $50 per year in interest to borrow $1,000, the loan would have a 5% interest rate.
international fund: a mutual fund that invests outside the United States (a global fund, on the other hand, invests in stocks and bonds throughout the world, including the U.S.). Also called a non-U.S. fund. American Funds offers two international funds, EuroPacific Growth Fund and International Growth and Income Fund.
investment adviser: a person or organization employed by an individual or mutual fund to manage assets or provide investment advice. The investment adviser to the American Funds and the American Funds Target Date Retirement Series® is Capital Research and Management CompanySM. See also adviser.
investment company: a firm that invests the funds of investors in securities that meet stated investment objectives for individual or institutional clients, in return for a management fee. An investment company offers participants benefits such as diversification and professional money management. There are two types of investment companies: an open-end, or mutual fund, which has a floating number of shares and will redeem shares at any time at net asset value; and a closed-end, or investment trust, which has a fixed number of shares traded like a stock.
Investment Company Act of 1940: federal laws that regulate the registration and activities of investment companies, enforced by the Securities and Exchange Commission. The Act sets the standards by which mutual funds operate in areas such as advertising, reporting requirements, pricing and allocation of investments.
investment grade: a bond with a rating of AAA to BBB.
IRA: see Individual Retirement Account.