Understanding Your Investments: Prospectus

Joel Dresang: Kyle, an investor who puts money into a mutual fund is supposed to get a prospectus for that fund. A prospectus is a legal document that, as its name suggests, shows the prospects for that fund. Why is this so important for an investor?

Kyle Tetting: You know, Joel, with, thousands of different mutual funds out there, it can be difficult to determine what it is a fund is trying to do and what you should expect from a fund. Sometimes the fund name can give you an idea if it’s a growth fund or a value fund, if it’s an international stock fund or a bond fund. All of those things tend to show up in the name, but they don’t necessarily give you a clearer picture of what it is the manager is trying to do.

That prospectus really gives you a very clear objective, and it outlines a lot of the tools that the manager has available to them as far as getting to that objective.

Joel: Now, I think of these as having a lot of information in them, very small print, very technical language.

Kyle: They definitely are written by lawyers for lawyers, but I think it’s important to remember that there’s still a lot of stuff in there that can be important for the everyday investor.

Joel: What are some of the important things that investors should be paying attention to?

Kyle: First and foremost, the prospectus outlines expenses. So, you get an idea of what it’s going to cost you to invest in this particular fund. And with news out there every day saying more and more that expenses are one of the big determinants of portfolio performance, that’s the first place that a lot of investors look: “OK, what’s this going to cost me?”

But over and above that, you get an idea of risks of the fund. What kinds of things should we expect?

There is a section that deals with historical performance for the fund, so, you can get an idea of the range of potential outcomes to expect, as well.

Really, the investor is well suited to kind of look at some of those key areas, understand that a lot of what’s in there is going to be, you know, for the lawyers, as I said. But ultimately, you get a really nice way to kind of digest some, some pieces of information that you’re looking for.

Joel: And we’re talking about a statutory prospectus, which is bigger. But there’s also a summary prospectus, which is smaller. What’s missing from that, and is that sufficient for investors to look at?

Kyle: It’s not so much what’s missing. Certainly, it doesn’t have everything that’s in the statutory prospectus.

Learn more
Kyle shows how to use a summary prospectus for a mutual fund.

But I think for the average investor, what they’re looking for – the kinds of pieces of information they want to know – they’re going to find in that summary prospectus. Really the idea was to try and boil down some of what was in that larger document to something that the average investor can understand, something that they’re going to care for.

You know, there’s a number of other documents, as well, that are out there that can get to some of the same pieces of information.

Joel: There’s also a fact sheet. How does that compare?

Kyle: So the fact sheet is a more updated version – usually published monthly or quarterly, that gives you an idea not just of what the fund is trying to accomplish but what’s actually in the fund right now.

So it’ll have the same kinds of information like objectives and expenses, some historical return numbers, but over and above that, what you also get is here’s a list of top holdings, here’s kind of some sector allocation, maybe some stock versus bond allocation information.

You’ll also get oftentimes a little bit of commentary from the managers of the fund. So not only now are you getting, what is the fund trying to accomplish, but what kind of environment do we have that we’re doing this in, and what has that resulted in for the portfolio?

Joel: So, bottom line, what do you advise for investors when they get these mutual fund prospectuses?

Kyle: I think the instinct is to say okay, let’s just put this one in the junk email pile. But I think it is an important document to keep on hand, on the off chance that you’ve got a question about your particular fund that maybe isn’t simple to answer.

Odds are, what you’re looking for is going to be in that prospectus.

For the expert investor, for the advisors out there, this is something that we’re looking at every day. It helps us guide portfolio decisions for clients. But at the same time, it is something that every investor should at least know to look to when they have a question.

Kyle Tetting is director of research at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Jason Scuglik

(initially posted Dec. 18, 2015)