Learning how to read the simplified prospectus is a vital part of mutual funds investing. A simplified prospectus provides details about an investment, including information on its objectives and management. The prospectus discusses fees, mutual fund returns and the risks investors take when they buy mutual funds. Since the Securities and Exchange Commission (SEC) standardized the prospectus format, all prospectuses now contain similar sections and headings that satisfy the SEC’s disclosure requirements. Because prospectuses are so alike, you only need to learn how to read one to apply those skills over a lifetime of mutual funds investing. You do, however, have to understand the prospectus if you want to control fees and improve your mutual fund returns.
Read the Fee Schedule Before You Buy Mutual Funds
The first 10 to 30 pages of the simplified prospectus are devoted almost exclusively to the explanation of fees and risks. As this information applies to every fund in the prospectus and certain funds may be sold in different versions or series, investors need to be aware of rules that pertain to buying and selling different series of mutual funds. Investing without understanding trailer commissions, deferred sales charges and management fees can lead to unpleasant surprises later on down the road when you want to sell units or switch between funds. Ask your advisor or the fund distributor to explain fees for the various series before you buy mutual funds.
Fund Types and Objectives Affect Your Mutual Fund Returns
In the simplified prospectus, profiles of individual funds follow the general discussion of fees and risks. Mutual fund companies normally group profiles by type, beginning with money market and bond or income funds. Asset allocation or balanced funds and pure equity or stock funds round out the list of offerings in the prospectus. The profile of each fund identifies the fund’s type, its objectives and the strategies the manager employs to meet the objectives of the fund. For example, a profile might tell you that a US value fund aims to provide superior returns by investing in domestic companies at attractive valuations in comparison to industry peers. As the fund type and the manager’s objectives will affect mutual fund returns, investors need to understand the differences between international and domestic or equity and income funds.
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