Mutual Funds: What Are They?
Before anyone invest in mutual fund, or even index funds, there are many important things you need to know, like past performance of the fund, investment objectives, investment strategies and others. All these essential information is involving a document called mutual fund prospectus. Mutual fund prospectus is required by Securities and Exchange Commissions (SEC) to be made accessible by all potential investors (Kennon, 2017)
There are two kind of prospectuses; the statutory prospectus and the summary prospectus. The statutory prospectus is the conventional, long form prospectus that most mutual fund investors are familiar. The summary prospectus, which is now commonly used by many mutual funds, a few pages long and recorded the key information about the mutual fund. The information available in summary prospectus will be included at the beginning of statutory prospectus. The only difference between statutory prospectus and summary prospectus is there are more financial highlight information in the statutory prospectus.
The key information appears in the following standardized order: 1) investment objectives, 2) fee tables, 3) investments, risk and performance, 4) management, 5) purchase and sale of fund shares, 6) tax information, and 7) financial intermediary compensation.
A prospectus can be very informative and helpful if the investor have a clear mind-set of their investment goals (Stinson, 2014). According to Bob Mecca, before investor read any prospectus, investor should know their objectives of investing and their risk-tolerance is. For example, the investors are low risk taker and have small fund. After they read the prospectus and realized it is aggressive mutual fund and large cap portfolio, they should reject the portfolio and go for other mutual fund. Once the investor found the suitable portfolio that matched with their objectives and risk-tolerance, and then only pay attention to the investment policy and others.
Other than that, the prospectus provide huge information about how the fund invests, the amount of assets under management, the internal fund expenses, and more. (McGowan, 2016) As summary, this legal document enables investor to analyse about the mutual fund and to choose the right portfolio that match with their objectives, which, in a way to decrease their risk and increase their confidence towards the mutual fund. Therefore, the prospectus is the way of investor getting information about the certain mutual fund.