Skip to main content

Education

Showing all results

Topics

  • All Topics

Experience

  • All Levels

Key Terms Mentioned

Opens the scrolled simulated dialogImportant Disclosures

The Mutual Fund Prospectus

A mutual fund's prospectus has just about everything you need to know to make an informed decision about buying and holding that fund's shares. It may not be exciting reading, especially the long, more detailed version, but you ought to review at least the Summary Prospectus carefully before investing in any fund. You can find a link to a copy of an electronic version from any mutual fund's quote page.

What You'll Find

The prospectus describes the fund's investment objective, or what it is trying to accomplish, such as growth, income, or a combination of growth and income. It also explains the investment strategies and style the fund managers follow and provides a list of the fund's holdings at the end of the most recent quarter. The prospectus is not a guarantee that the fund will meet its investment objectives, but rather a description of what the fund aims to achieve.

You'll also find details about many important fund features. Some of the information is provided in graphs and charts that are consistent from prospectus to prospectus. This uniformity makes it a little easier to compare funds with similar objectives and styles.

You'll always find:

  • Principal risks the fund poses to an investor
  • A comparison of the fund's performance to the performance of the relevant market benchmark over different time periods
  • Management and investment fees that will be deducted from your position's value, listed as an expense ratio
  • The fund's turnover rate, which gives you a sense of how often the managers buy and sell the fund's underlying investments.

As an investor, you have the right to vote for a fund's Board of Directors and on major changes in a fund's underlying policies that it proposes. For example, one issue may be the amount of money the fund can borrow to make additional investments. Since mutual fund investors are actually shareholders of the fund, they vote in the same way corporate shareholders do, either in person at the annual meeting, or by proxy online.

Fees

A summary of fees and other charges usually appears near the beginning of the prospectus. The Securities and Exchange Commission (SEC), which requires funds to provide a prospectus, wants investors to be sure they understand the costs.

The annual asset-based fees for managing the fund can range anywhere from less than 0.2% to 1.50% or sometimes, much more. Index funds often have the lowest fees, and international equity or emerging market funds having higher ones.

You may pay sales charges, also known as loads, to buy some funds. The charge is typically figured as a percentage of the amount you invest. But you may pay this amount at different times, depending on the type of shares you buy.

Front-end loads are paid at the time you purchase your shares. This is the most common type of sales charge and often the least expensive, and depending on the amount you invest, may be reduced or waived altogether. Instead of a front-end load, you may pay a back-end load, also known as a contingent deferred sales charge. It will be due if you sell shares during the first few years after purchase. A third type, known as a level load, has no front- or back-end charges but imposes higher asset-based fees than the other loaded funds, and will probably charge a fee if you sell within a year.

When a fund offers a choice of when to pay the sales charge, it typically identifies front-end loads as Class A shares, back-end loads as Class B shares, and level loads as Class C shares. You can avoid this particular kind of charge by choosing no-load funds (but other fees and expenses may apply to continued investment in the fund).

The Nuts and Bolts

There are some other decisions you have to make at the time you invest. The prospectus will have information about them as well.

Minimum investment amounts are often required when you open a new mutual fund account and each time you buy more shares. The initial amount is higher than the amount required for making additional investments.

Reinvestment options let you decide what to do with the distributions you earn. You can elect to reinvest them automatically to buy additional shares in the fund or take the distribution in cash.

Exchange services allow you to authorize your broker to transfer money from one fund to another that's registered in the same way (in the same fund family). However, this type of transfer involves selling shares and may result in a capital gain that could be subject to tax, and you may be charged commission for the exchange.