10/1/2008 9:00 AM ET|
Mutual fund documents, Part 1
FUNDS 108: You need three valuable fund documents, produced by the company running your mutual fund: The prospectus, the Statement of Additional Information, and the annual report.
You've heard the pundits on TV -- Five stars! -- when giving their hot pick of the month. And you probably know one or two lucky co-workers who made a mint at some point after taking a chance on some fund or another. But you can't have missed the recent tales about the downfalls of yesterday's favorite fund shops, the management scandals and the huge, risky bets that cost many investors their retirement dreams.
Clearly, the experience of recent years suggests that investors need more than performance numbers and hot tips to judge a fund.
Before parting with your money, you need to be able to answer questions such as: What is the fund's investment strategy? What are that strategy's risks? How much does the fund cost? How does this fit in with my goals? And who runs the thing, anyway?
In order to answer these questions you need three valuable fund documents, produced by the company running your mutual fund: the prospectus, the Statement of Additional Information and the annual report.
When you request an information kit from a fund family, you'll usually receive the prospectus and the most recent shareholder report. (Many fund companies also make these documents available on their websites.) These documents are packed with legal jargon, convoluted sentences and boilerplate information in order to fulfill the Securities and Exchange Commission's disclosure requirements and to protect the funds from legal liability. The language can be tremendously intimidating -- and reading it is dull work.
But these documents are vital for mutual fund investors.
Here's how to get what you need from the prospectus and the Statement of Additional Information. (We'll cover the annual shareholder report in our next lesson.)
The prospectus tells you how to open an account (including minimum-investment requirements), how to purchase or redeem shares and how to contact shareholder services.
It also details six aspects of the fund that you need to know about before you decide to buy shares.
1. Investment objective. The investment objective is the mutual fund's purpose. Is the fund seeking to make money over the long term? Is it trying to provide its shareholders regular income each month? If you're investing for a young child's education, you'll want the former. If you're looking for a monthly dividend check, you'll want the latter. But investment objectives are often vague. That's why you'll want to check out the next section.
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