Reading your mutual fund prospectus

Back in the day, you had to be an investment professional to understand anything in a prospectus beyond the name of the security. Thankfully things have changed. Happy Reading

 

READING A PROSPECTUS

 

 

Are you having trouble sleeping at night? Pick up that long pamphlet you received when you bought your last mutual fund, and crack it open. If you get past the first three pages, CONGRATULATIONS. You have now read more than your broker has.

 

When I was a stockbroker broker the most hated thing I never wanted to hear, other than no, was, “let me read the prospectus first.”

 

Actually getting a no is not as bad. If you keep at it, you can turn a no into a yes, but you can't do much about a request for the prospectus. First off, you won't get the sale that day so stop your calculating, and secondly you probably don't have one around the office. That means a call to the mutual fund company to have them send one. Resuming your conversation for after the client has read the prospectus is usually an exercise in futility. NOBODY actually reads it.

 

So why not? Things have changed a lot since I was an advisor and one of those changes has been the wording of prospectuses. Our industry is full of slang and technical language you practically need a dictionary of financial terms when you first get hired.

 

Reading a prospectus geared towards the industry professional is a long, often twenty page, dry boring read. Here is what you will find in that pile of paper you've been putting off.

 

  • Date the prospectus was issues: A prospectus should be updated each year so make sure you have the most recent.

  • File number: The file number starts with 811 and is on the back page. With the file number you can see other documents that have been filed with the SEC.

  • Risk/Return table and Bar chart: The bar chart shows the total returns for the last ten years. If the fund has been around less than a decade it will show the annual total returns for the life of the fund. The table sets forth the returns for the previous 1,5,10 year periods, both before and after taxes.

  • Fee Table: This will show the anticipated annual fees and expenses including operating expenses and shareholder fees.

  • Information for shareholders: This will show you how to redeem and purchase shares as well as tax consequences and minimum initial purchase amounts as well as subsequent amounts required.

  • Financial Highlights: This is typically located in the back of the prospectus. Look here if you are interested in the net asset values, total returns, portfolio turnover rate, expenses to average net asset ratio, and net income to average net asset ratio, and etc...

 

If it has been some time since you last read a prospectus you will be presently surprised by what you find. So maybe it is time to drive your broker bonkers and request that he snail mail a prospectus to you and further frustrate him by telling him you will call if you are still interested.

 

Happy Investing.

 

 

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