Subscribe
Previous Post
The SEC requires mutual funds to provide all investors with a copy of the fund’s prospectus. What’s in there?
Years ago many potential investors may have needed a translator to interpret the contents of a mutual fund prospectus, but the SEC stepped in and cleared the air. Funds must use layman’s terms (for example, no industry jargon) to describe the details of the fund.
Ohoto by ohl@work, Courtesy of flickr
Here are a few important items you will find in a fund’s prospectus:
Objective – What is the fund’s management trying to accomplish? Some objectives include aggressive growth, equity income, short-term bonds and sector funds.
Risk/Return chart and table – The fund must disclose its annual returns for the past ten years. Most funds must also include before and after-tax returns for 1-year, 5-year and 10-year holding periods. The returns of an appropriate benchmark must also be included.
Fee Table – Mutual funds have annual fees and expenses that are passed on to investors. The fees cover items like the manager’s compensation, as well as marketing and distribution. Expenses cover operational costs.
A hypothetical $10,000 example is provided to illustrate the impact of fees on your investment over several time frames (1,3,5 and 10 years).
Financial highlights – This section will include 5 years of audited information about the fund’s performance. You can find details on the fund’s net asset value (NAV), expense ratio, and turnover ratio. Turnover can serve as an indicator of the fund manager’s trading activity.
As with any investment, you should examine the details first. So look at the prospectus BEFORE you invest. To obtain a fund prospectus, pick up the phone and call the fund.
For a detailed article on how to read a mutual fund prospectus, visit thefool.com.
