1. How to Read a Mutual Fund Prospectus
Mutual Fund Quiz:
How much do you remember about mutual funds?

2. Mutual Fund Video
(What is a Mutual Fund?)
Source: Focus on Personal Finance, McGraw-Hill (2010)

3. Reading a Prospectus is an Important Life Skill
Need to make wise investment decisions
Need to make good 401(k) plan choices
To not be “taken” by slick salespeople

4. What is a Prospectus?
A legal document required to be given to mutual fund investors
Potential time and money saver
Written in “legalese”
A mutual fund screening tool
A reference tool
Start a “fund file”

5. Class Objective
To review the important sections of a mutual fund prospectus
To learn how to use the information in a prospectus to make fund decisions

6. Name of the Mutual Fund Prospectus must be updated at least annually
May be a “consolidated” prospectus for several funds from the same fund family
Example: Vanguard U.S. Stock Index Funds

7. Required Cover Statements
Standardized “CYA” language
Clearly states in bold print that there is no government approval of the fund
To state that there is approval is a crime
Tells investor about the availability of
Statement of Additional Information (SAI)
Annual and semi-annual reports to shareholders

8. Statement of Fund Investment Objective
Varies with the type of mutual fund
Three PRIMARY Objectives:
Stability (preservation of principal)
Example: Money market mutual funds
Growth (increased value over time)
Examples: Stock mutual funds, stock index funds
Income (generating a stream of payments)
Example: Bond mutual funds, bond index funds

9. Example of a Mutual Fund Objective
The fund invests with the objective of capital growth. Although income is considered in the selection of securities, the Fund is not designed for investors seeking primarily income rather than capital appreciation.

10. Fees and Expenses Shareholder Fees Annual Fund Operating Expenses
Charged to an individual investor’s account
Examples: sales load, redemption fee, account maintenance fee, exchange fee
Annual Fund Operating Expenses
Paid by mutual fund as a % of assets
Examples: management fee, 12b-1 fee, other expenses
Standardized hypothetical example
1, 3, 5, and 10 years of fees on $10,000

11. Financial Highlights Table
NAV, beginning of period
NAV, end of period
Net assets, end of period
Ratio: total expenses & average net assets
Number of outstanding shares
Total return for period
Turnover rate

12. Investment Policies The “personality” of a fund
What it will do and won’t do
Securities purchased to meet fund objective
Investment quality of securities
Use of speculative practices (e.g., selling on margin, futures contracts, derivatives)
Limits on % of fund assets in one industry

13. Investment Risks
Describes principal risks associated with investing in a particular fund
Example: currency risk (global fund)
Describes risks associated with a type of investment
Example: interest rate risk on bond funds
Describes range of quality ratings allowed
Example: low rated bonds in junk bond funds

14. Investment Advisor Information
Name of advisor (e.g., The Vanguard Group)
Beginning of operations (e.g., since 1975)
Amount of assets under management
Services provided by investment advisor
compensation to investment advisor as a % of assets
Special arrangements such as bonuses

15. Fund Distributions and Taxes
Frequency of fund distributions
Dividends
Capital gains
Sale or exchange of shares is a “taxable event”
Procedure for reinvesting distributions

16. How to Purchase Shares Method(s) of Purchase Price of Purchase
Online, by check, by exchange, through a broker/sales agent
Price of Purchase
NAV or NAV plus a sales load
Price breaks for large purchases
Minimum Purchase Amounts
Minimum initial deposit and later deposits
Minimums for IRAs and automatic purchase plans

17. How to Redeem Shares
Methods by which shares can be redeemed (e.g., check-writing, telephone request, written request, wire transfers)
Description of redemption price
Example: “You redeem shares at the fund’s next-determined NAV after [company] receives your redemption request.”
Process to exchange fund shares

18. Profile Prospectuses Short and sweet Key pieces of information only
One double-sided page
Key pieces of information only
Short paragraphs
Sometimes in “Q&A” format
Should still request full prospectus

19. Start a File For Every Fund That You Own
Most recent prospectus
Copy of original application form
Annual account statements
Periodic statements
Articles about the fund, manager, etc

20. Five Key Factors to Scrutinize
Fund objective
Fees and expenses (for type of fund)
Historical performance
Investment policies relative to personal risk tolerance
Minimum initial and subsequent deposits

21. Wall Street Journal “Screening Factors”
Sector funds
Load funds
High-cost funds
High minimum deposit funds
Newcomers
Poor performers (relative to indexes)

22. Follow “The Rule of Three”

23. Class Assignment
ts/mutualfund-comparison.html
Read prospectuses of three similar type mutual funds
Complete the table
Write a paper that describes what you learned from the comparison and the best fund for you

24. Activity: Infographic Insights
What is a Mutual Fund? Infographic (Finance Infographics): is-a-mutual-fund/
Make Money by Mutual Funds Infographic (Business 2 Community/Infogr.am): by-mutual-funds--infographic
Mutual Funds Infographic (Piktochart): infographic