How to Read a Mutual Fund Prospectus (Part 2 of 3: Fee Table and Performance)
June 13, 2016
The SEC’s Office of Investor Education and Advocacy is issuing a series of three Investor Bulletins 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.
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.
- Shareholder transaction expenses include sales charges (also known as “loads” or “commissions”), which are generally paid to the investment professionals who sold the fund to you to compensate them for their services. You can also purchase shares of certain funds without sales charges directly from those funds (“no-load” funds) without the assistance of an investment professional. Shareholder transaction expenses can also include additional costs, such as account maintenance fees that may be charged if the size of your investment drops below a minimum amount.
- Annual fund operating expenses are frequently referred to as the “expense ratio,” because they indicate the percentage of net assets that are used by the fund each year to pay for fees and expenses. These fees and expenses include management fees, “rule 12b-1” fees, and other expenses. Management fees are paid to compensate the investment adviser for determining what securities the fund should invest in and providing related services. “Rule 12b-1” fees are paid out of fund assets for marketing and sales costs. Other expenses include miscellaneous expenses such as auditing, legal, custodial, and transfer agency fees. Funds may also temporarily waive (or stop charging) some of these fees to attract or maintain investors , although these fees may be charged again or recouped in the future.
- The hypothetical example will show the estimated cost of owning the fund in actual dollar amounts (instead of in percentages) based on a hypothetical investment of $10,000 over the course of one, three, five and ten years, both where the investor redeems his or her shares at the end of those periods or instead holds those shares through those periods. The hypothetical example reflects both the operating and shareholder transaction expenses you will pay and illustrates how minimizing those expenses can help maximize the rate of return from your investments.
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 bar chart will depict the fund’s historic performance, and will demonstrate how consistent (or not) the fund’s returns have been.
- The table will compare the performance of the fund to that of the broader market (as represented by a market index). In some cases, the fund will also include a comparison to a more narrowly based index the fund believes serve as a better benchmark for comparative purposes.
- The fund’s performance for its best and worst calendar quarters indicates how volatile its returns have been.
For additional educational information for investors, see the SEC’s Investor.gov website or the Office of Investor Education and Advocacy’s homepage. For additional information related to reading mutual fund prospectuses, also see:
• How to Read a Mutual Fund Prospectus (Part 1 of 3) – Contains information about investment objectives, strategies, and risks.
• How to Read a Mutual Fund Prospectus (Part 3 of 3) – Contains information about management, shareholder information, and the Statement of Additional Information.