There is no shortage of information about mutual funds. Countless websites and online publications offer reams of data on the thousands of mutual funds issued in and outside the United States. What's more, many books, magazines and other print publications also provide extensive data and analysis on mutual funds.
But there is only one definitive source for mutual fund information: the fund prospectus. The prospectus is issued by the fund provider and it contains all the detailed data and information investors need when choosing a fund.
The prospectus: Your guide to mutual funds
The mutual fund prospectus contains a wealth of important information, and the law requires that investors receive a prospectus before they invest. At first glance, of course, a prospectus may seem less than reader-friendly. It is, after all, a legal document that must adhere to rigorous standards set forth by the Securities and Exchange Commission (SEC), the federal agency that oversees the mutual fund industry.
But with a little basic knowledge of the information contained in a prospectus, you can make effective use of this valuable investment-planning tool.
Don't be surprised: Be informed
Consider these examples:
- An investor sells his mutual fund shares and is surprised to learn that a portion of the sale price is paid to the fund company in the form of a back-end load.
- An investor exchanges her investment in one fund for another fund in the same fund family. She did not know that fees were charged for the exchange.
- A retiree in search of income invests in a high-yield bond fund but doesn't know it is also high-risk and is disturbed by its fluctuating value.
- Attempting to make a mortgage payment with money from a mutual fund account, an investor discovers that the fund places a minimum amount on its check writing privilege.
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Key elements of a mutual fund prospectus
Date of issue -- First, verify that you have received an up-to-date edition of the prospectus. A prospectus must be updated at least annually.
Minimum investments -- Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments.
Investment objectives -- The goal of each fund should be clearly defined - such as income with preservation of principal or long-term capital appreciation. Be sure the fund's objective matches your objective.
Investment strategies -- A prospectus will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.
Risk factors -- Every investment involves some level of risk. In a prospectus you'll find descriptions of the risks associated with investments in the fund. Refer to your own objectives and decide if the risk associated with the fund's investments matches your own risk tolerance.
Performance data -- You'll find selected per-share data including net asset value (NAV) and total return for different time periods since the fund's inception. Performance data listed in a prospectus are based on standard formulas established by the SEC and enable you to make comparisons with other funds. Remember that past results do not guarantee future performance. When evaluating performance, look at the track record of a fund over a time period that matches your own investment goals.
Fees and expenses -- Sales and management fees associated with a mutual fund must be clearly listed. The prospectus will also display the impact these fees and expenses would have on a hypothetical investment over time.
Tax information -- A prospectus will include information on the tax status and implications of a fund's distributions, and whether they will be treated as dividend income or capital gains.
Investor services -- Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic withdrawal plans. This section of the prospectus, usually near the back of the publication, will describe these services and how you can take advantage of them.
To simplify the process of reviewing mutual fund prospectuses, certain information is required to appear in the same place each time. For example, the fee table and performance table must appear at the beginning of the prospectus.
While the rest of the material can appear in any order, you'll generally have no trouble finding the information you need. Prospectuses generally range from 10 to 20 or more pages and include a table of contents. And after reviewing a few prospectuses, you'll become accustomed to the language and be able to reduce the time it takes to find the information you need to make a sound investment decision.
You can receive prospectuses free from mutual fund companies, a broker, or a registered representative. Be sure to read the prospectus and ask questions about items that you are not sure about before investing. Your financial professional should be able to answer any questions.
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Please always consider the charges, risk, expenses, and investment objectives carefully before purchasing mutual funds. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.
This article is provided for your informational purposes only.
Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transactions(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.
AXA Equitable Life Insurance Company (NY, NY) issues life insurance and annuity products. Securities offered through AXA Advisors, LLC, member FINRA, SIPC. AXA Equitable and AXA Advisors are affiliated and does not provide legal or tax advice. does not provide legal or tax advice.
GE 115054 (12/2016)