Reading the Fine Print: Helping Clients Evaluate Mutual Fund Prospectuses

Robinson, Thomas; Schulte, David; Marmorstein, Howard; Trent, William; Gervais, Eric J.
April 2010
Journal of Financial Planning;Apr2010, Vol. 23 Issue 4, p54
Academic Journal
Investors and their advisers need to be able to read, decipher, and evaluate offering documents, including prospectuses and statements of additional information (SAl), to assess the risks and potential opportunities involved in investments such as mutual funds. This article discusses how to evaluate the prospectus and SAl of an open-end investment company or mutual fund. Key points also apply to other investment company prospectuses, such as those for closed-end funds and unit investment trusts. The article provides examples of prospectuses and related documents required by the U.S. Securities and Exchange Commission (SEC). SEC regulations generally require that a prospectus be delivered to investors at the time of, or before, the purchase of a mutual fund. Some key points to consider in evaluating a prospectus are the funds investment objectives, risks, fees, management, legal proceedings, and redemption restrictions. These factors can then be compared to corresponding information for other potential investments. Required statements include a balance sheet, income statement, and statement of changes in shareholder equity for the fund itself, although others are required in certain circumstances. Advisers and their clients can find important information in the SAl and should augment their knowledge by reviewing investment companies' annual and periodic reports. The article concludes that advisers can provide valuable guidance for their clients by highlighting the key points regarding risks and opportunities that investors should consider before investing in mutual funds.


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