How to Read a Mutual Fund Prospectus

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How to Read a Mutual Fund Prospectus
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What is a Prospectus?

• A legal document required to be given to mutual
  fund investors
• Potential time and money saver
• Written in legalese
• A mutual fund screening tool
• A reference tool-
• Start a fund file

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Class Objective

• To review the important sections of a mutual
  fund prospectus
• To learn how to use the information in a
  prospectus to make fund decisions

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Name of the Mutual Fund

• Prospectus must be updated at least annually
• May be a consolidated prospectus for several
  funds from the same fund family
• Example Vanguard U.S. Stock Index Funds

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Required Cover Statements

• Standardized CYA language
• Clearly states in bold print that there is no
  government approval of the fund
• To state that there is approval is a crime
• Tells investor about the availability of
• Statement of Additional Information (SAI)
• Annual and semi-annual reports to shareholders

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Statement of Fund Investment Objective

• Varies with the type of mutual fund
• Almost 30 different objectives (ICI)
• Three PRIMARY Objectives
• Stability (preservation of principal)
• Example Money market mutual funds
• Growth (increased value of principal over time)
• Examples Stock mutual funds, stock index funds
• Income (generating a stream of payments)
• Example Bond mutual funds

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Example of a Mutual Fund Objective
The fund invests with the objective of capital
growth. Although income is considered in the
selection of securities, the Fund is not designed
for investors seeking primarily income rather
than capital appreciation.
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Fees and Expenses

• Shareholder Fees
• Charged to an individual investors account
• Examples sales load, redemption fee, account
  maintenance fee, exchange fee
• Annual Fund Operating Expenses
• Paid by mutual fund as a of assets
• Examples management fee, 12b-1 fee, other
  expenses
• Standardized hypothetical example
• 1, 3, 5, and 10 years of fees on 10,000

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Financial Highlights Table

• NAV, beginning of period
• NAV, end of period
• Net assets, end of period
• Ratio total expenses average net assets
• Number of outstanding shares
• Total return for period
• Turnover rate

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Investment Policies

• The personality of a fund
• What it will do and wont do
• Securities purchased to meet fund objective
• Investment quality of securities
• Use of speculative practices (e.g., selling on
  margin, futures contracts, derivatives)
• Limits on of fund assets in one industry

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Investment Risks

• Describes principal risks associated with
  investing in a particular fund
• Example currency risk (global fund)
• Describes risks associated with a type of
  investment
• Example interest rate risk on bond funds
• Describes range of quality ratings allowed
• Example low rated bonds in junk bond funds

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Investment Advisor Information

• Name of advisor (e.g., The Vanguard Group)
• Beginning of operations (e.g., since 1975)
• Amount of assets under management (e.g., 592
  billion in assets)
• Services provided by investment advisor
• compensation to investment advisor as a of
  assets
• Special arrangements such as bonuses

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Fund Distributions and Taxes

• Frequency of fund distributions
• Dividends
• Capital gains
• Sale or exchange of shares is a taxable event
• Procedure for reinvesting distributions

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How to Purchase Shares

• Method(s) of Purchase
• Online, by check, by exchange, through a
  broker/sales agent
• Price of Purchase
• NAV or NAV plus a sales load
• Price breaks for large purchases
• Minimum Purchase Amounts
• Minimum initial deposit and later deposits
• Minimums for IRAs and automatic purchase plans

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How to Redeem Shares

• Methods by which shares can be redeemed (e.g.,
  check-writing, telephone request, written
  request, wire transfers)
• Description of redemption price
• Example You redeem shares at the funds
  next-determined NAV after company receives your
  redemption request.
• Process to exchange fund shares

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Profile Prospectuses

• Short and sweet
• One double-sided page
• Key pieces of information only
• Short paragraphs
• Sometimes in QA format
• Should still request full prospectus

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Five Key Factors to Scrutinize

• Fund objective
• Fees and expenses (for type of fund)
• Historical performance
• Investment policies relative to personal risk
  tolerance
• Minimum initial and subsequent deposits

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Wall Street Journal Screening Factors

• Sector funds
• Load funds
• High-cost funds
• High minimum deposit funds
• Newcomers
• Poor performers (relative to indexes)

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Follow The Rule of Three
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Start a File For Every Fund That You Own

• Most recent prospectus
• Copy of original application form
• Annual account statements
• Periodic statements
• Articles about the fund, manager, etc