posted on 21 June 2016
from the Securities and Exchange Commission
The SEC's Office of Investor Education and Advocacy is issuing this Investor Bulletin to help inform investors about key information in a prospectus. You should note, however, that a prospectus contains additional information that may assist investors in making an investment decision.
Mutual funds use a document called a prospectus to disclose information about the fund to investors. The SEC requires mutual funds to include important information in the prospectus, including:
SEC rules require mutual funds to provide a copy of the fund's prospectus before or with the delivery of fund shares to investors, but you can - and should - also request and read a prospectus before making an investment decision. You can obtain prospectuses from the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") database or directly from the fund (most funds provide their prospectus on their websites and also have toll free numbers where you can request a copy). Funds also may provide a "summary prospectus," which is generally just a few pages long, but indicates where you can obtain the full prospectus.
The investment objective of a fund frequently will be: (1) capital appreciation; (2) income; or (3) a combination of the two.
Generally, funds that seek capital appreciation are considered a more aggressive investment strategy (i.e., have the potential for greater returns, but also the possibility of greater losses), while funds that seek income are considered a more conservative investment strategy.
The principal strategies of the fund tell you how the fund intends to achieve its investment objective. These strategies indicate the approach the fund's adviser takes in deciding which securities to buy or sell. For example, the fund may choose to concentrate in one or more industries, geographic regions, or types of securities. In addition, some funds may be actively managed while others seek to replicate the performance of a specified index. Although a fund's name often suggests that the fund focuses on a particular type of investment, you should not rely upon the fund's name without examining the prospectus further.
Some funds may also reserve the right to take a "temporary defensive position." These funds may invest 100% of assets temporarily in cash or other relatively safe instruments in anticipation of a market downturn that could adversely affect fund performance, even if that would not normally be consistent with the fund's primary investment strategy.
All investments in funds involve risk of financial loss. The reward for taking on risk is the potential for a greater investment return. An investor with a high-risk tolerance is generally willing to risk losing money in order to seek larger investment gains than those typically achieved by a lower-risk investment. On the other hand, an investor with a low-risk tolerance may favor investments in funds that are generally more stable in value.
When reading a fund prospectus, it is important to determine if the fund satisfies your investment objective and matches your risk tolerance, as well as the risks in your overall portfolio. Your risk tolerance depends upon several factors, including your financial situation, age, and family obligations.
The types of risks to which a fund is subject vary considerably with the nature of its investments. Some of the more common risks for funds include:
When you consider investing in a fund, its fees and expenses are an important factor to consider. A fund with high costs must have higher investment returns than a low-cost fund to generate the same returns for you. Even small differences in fees can add up to substantial differences in your investment returns over time. Prospectuses are required to present fees and expenses in a standardized format to help investors more easily compare them across different funds.
The prospectus will include: (1) shareholder transaction expenses, which are charges you pay directly, such as sales charges that might be charged when you buy and sell shares in the fund; (2) annual fund operating expenses, which are ongoing charges that are paid by the fund but that you pay indirectly each year you are invested in the fund; and (3) a hypothetical example that shows the estimated expenses that you will pay for investing in the fund over different time periods.
Funds will often offer different share classes that invest in the same "pool" or investment portfolio of securities but have different sales charges and operating expenses. For example, class A shares might have a 4% front-end sales load but no ongoing rule 12b-1 fees, and thus might be a good fit for a "buy and hold" investor who plans to remain invested for many years until retirement. In contrast, class C shares might have no front-end sales load but instead have a 1% annual rule 12b-1 fee, and thus be a better fit for a short-term investor who plans to sell quickly (in this case, within four years of purchase). Consider your personal situation when deciding which share class is right for you.
For more information about fees and expenses, including a chart showing how different fees and expenses would affect a hypothetical investment of $100,000 over 20 years and information about front end sales loads, deferred sales loads, and redemption fees, please refer to Investor Bulletin: Mutual Fund Fees and Expenses.
When you consider investing in a fund, its investment performance is another factor to consider. However, past performance is no guarantee of future results.
The prospectus will include: (1) a bar chart displaying the fund's investment performance for the past ten years (or since the fund's creation if the fund has less than ten years of performance history); (2) a table comparing the fund's performance over the past ten years relative to a broad-based securities market index; and (3) the fund's performance for its best and worst calendar quarters.
The management of the fund is an important element in determining its investment success. The prospectus will describe: (1) the investment adviser (and any sub-advisers the investment adviser may hire) and (2) the individual portfolio manager(s) employed by the investment adviser.
The prospectus will contain other information for shareholders, including information about: (1) buying and selling fund shares; (2) distributing dividends; (3) and exchanging shares between funds.
Statement of Additional Information
Although the prospectus provides much information needed to make an informed investment decision, the statement of additional information ("SAI") provides more detailed disclosures if you want more information. The SAI generally includes information about: (1) the history and description of the fund; (2) fund officers and directors; and (3) other topics.
Funds must provide you the SAI without charge if you request it. You can obtain an SAI by calling the toll-free number that appears on the back cover page of the prospectus, or by searching the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") database.
Mutual fund prospectuses provide you with important information so you understand how the fund works and can easily compare it with other funds. If you wish to make an informed investment decision, you should read the prospectus before buying or selling shares in a mutual fund. If you would like additional information, you can obtain an SAI free of charge from the fund or from the SEC's EDGAR database.
For additional educational information for investors, see the SEC's Investor.gov website or the Office of Investor Education and Advocacy's homepage.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
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