Types of Mutual Fund Prospectus
There are two types of mutual fund prospectuses that differ based on how much information they provide. Statutory Prospectus: A detailed document, including information about the fund’s investment objectives/goals, fees, risks and performance, management, shareholder information, and commissions, called a statutory prospectus is required to be delivered to all shareholders. Summary Prospectus: Most funds also produce a summary prospectus, which is a few pages long and contains more marketing language than legalese. You should analyze both prospectuses before making a purchase.
How To Read a Mutual Fund Prospectus
To understand where you should be looking for information in a mutual fund prospectus, let’s go over each section in the statutory prospectus. There are primarily three parts to a statutory prospectus:
Part I : Investment Objective, Strategies, and Risks
Most funds focus on either capital appreciation (via increased stock prices) or income (via dividend or bond payments). This section of the prospectus will detail what strategy the fund uses to meet that objective. Since it is important for investors to understand whether the fund matches their risk profile, this first section of the prospectus also contains the risks associated with investing in the fund. Niche funds, such as those that concentrate in only a few stocks, will detail the additional risk investors may have with the fund.
Part II: Fees Table and Performance
Think of this section as a cost-benefit analysis for the fund. It will lists out the fees and commissions associated with the fund while also describing the historical performance of the fund. The fee section includes three parts:
Shareholder transaction expenses: These are expenses related to purchasing or selling shares in a mutual fund. They include both front-end and back-end sales loads, purchase fees, redemption fees, and account maintenance fees. Annual fund operating expenses: These are expenses that a mutual fund charges for running the fund. They include the expense ratio reflective of the fund’s administrative costs, 12b-1 fees paid to brokers for selling the fund, and fund management fees. A hypothetical example: This example shows what investor costs would be in a typical year.
The prospectus will also include a table and charts showing historical performance with comparisons to relevant indexes along with the statement that past returns are no guarantee of future returns.
Part III: Management, Shareholder Information, and Statement of Additional Information
The prospectus lists both the management company that advises the fund and the individual portfolio managers who are responsible for making investment decisions. Next is information on how the purchases of fund shares can be made, options for dividend distribution, and potentially information on how to exchange shares of a fund for shares of a fund in the same fund family. Lastly, the statement of additional information will typically include the portfolio managers’ resumes and time working with the fund, among other disclosures.
What It Means for Individual Investors
The mutual fund prospectus is the key document for researching a new potential mutual fund investment. Let’s go over some good practices to use in the most important sections.
Investment Objectives/Goals
The investment objective gives you a glimpse into what the fund hopes to achieve and what risks it’s willing to take to meet those goals. While the investment strategy alone may not make or break your investment decision, it’s good to keep in mind the objectives of the various funds you own. For example, if you already own three mutual funds that specialize in South American real estate, it may be a good idea to diversify with the next one.
Fees & Commissions
Because of compound interest, a fee of even 0.25% can lead to a big change in investment results. Let’s say you have $100,000 that you can invest in a fund that earns 4% a year for 20 years. If there are no fees or expenses, your initial investment will grow to a little over $219,112. Here’s how any fee would impact that return: It’s true that past performance is no guarantee of future results, but past poor performance could be a good sign that you’re better off with an index fund. If a fund consistently underperforms an index, it may be worth taking the time to see if you can just invest in the index.
title: “What Is A Mutual Fund Prospectus " ShowToc: true date: “2022-12-08” author: “Edna Sutton”
If you plan to invest in a mutual fund, it is crucial to access and review the prospectus. It contains a massive amount of information that you can’t get elsewhere.
Investment Strategy
The firm that manages your mutual fund will use a single approach or set of rules to invest your money. Some funds follow a value investing strategy, while some go for growth stocks. Others may use more risky strategies that involve stock options. These days, it is fairly common to use a strategy based on mimicking an index such as the S&P 500.
Investor Paid Expenses
The prospectus includes a breakdown of the types of expenses that the fund shareholders paid over the past few years. These fees include management fees to cover the operating cost of hiring and working with advisors, analysts, and managers. They also include 12b-1 fees that help cover the cost to market and to pay securities professionals. The sales load will also be defined. Loads are the commissions charged when an investor buys or sells shares in the fund. Loads can be front-end or back-end. Some funds may be classified as no-load funds. While no-load funds do not charge fees on entry or exit, they will charge fees during the holding period. Sales loads go to pay brokers. Redemption fees are also charged when a fund is sold. This type of fee goes straight to the fund management and is used to offset the cost to process the redemption. Other fees include account fees, purchase fees, and annual operation fees. The prospectus will have a fee table that will show the total expense per year as a percent you will be charged if you invest.
Performance and Risk Disclosures
The long-term performance disclosure compares how well a mutual fund performs when compared to a benchmark such as the Dow Jones Industrial Average. The mutual fund prospectus may explain why a certain benchmark is the best method to compare and assess. When you invest in any given mutual fund, you have no choice but to face some major risks. The prospectus will include these risks so that you have fair warning. For example, a global or international mutual fund prospectus will go into extra detail to explain currency risks, the chance that a company might restrict capital, or the dangers of war. It may also include a number of other factors that are less relevant to a strictly domestic fund. If the fund employs leverage, it will be explained where and when they do this. The prospectus will tell if the mutual fund lends its own securities out to others, such as short sellers, in exchange for income. The portfolio turnover rate will also be shown. Turnover means the changes to the holdings in the fund’s portfolio. This information can give you some concept as to the tax efficiency of the fund. Longer holding times tend to result in deferred tax liabilities.
Directors and Management
The names of the directors or trustees who represent the mutual fund shareholders will be listed. Along with the names, you will be given the range of how much each person invests in the fund (such as $10,0001 to $50,000 or $100,000+). You will also be able to see how much each person earns for their service. This includes the amount the directors are paid, as well as the control persons and the principal owners of the fund. This will include the firm’s holding securities on behalf of the actual investors in “street names.” You can use these details about the managers of the mutual fund assets to help you assess whether or not you think they have the knowledge and credentials to handle your money. The range of money invested by the people who are in charge of making major strategic moves will be disclosed. This includes the portfolio manager or members of the investment committee. It will show you if they have money in the fund itself. This factor alone can help you decide how much they have at stake, and whether they are sufficiently exposed to the risks of their choices. An example may say, “John Smith, the Chief Investment Officer, has $100,001 to $500,000 of his own money invested in the ABC mutual fund, and $500,001 to $1,000,000 of his own money invested in the XYZ mutual fund.”
Where Can You Find a Mutual Fund Prospectus?
Mutual fund companies are required by law to provide you with a prospectus before you invest. Almost all fund companies now post their prospectus online for public view as a free download. It sounds overly simple, but you can either search for “[Fund Name] prospectus” in a search engine or find the official mutual fund website and look around. It’s sure to be listed nearby. You may also come across a summary prospectus, which is a shorter version of the full prospectus. Fund managers want you to read this information because they want you to know what you’re getting into if you choose to invest. Most brokers will also be able to provide a copy. In recent years, many of the largest online stock brokers have included a link to the mutual fund prospectus on the search results that are displayed if you search the ticker symbol on the broker’s site. Once you read a few dozen of these, you should start to get a feel for what is normal and what isn’t. This is a good habit to get into because, if you are wise, it can aid you in building a better portfolio for your own needs.
