How to Read a Mutual Fund Prospectus (Part 3 of 3: Management, Shareholder Information, and Statement of Additional Information)
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.
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 investment adviser (also known as the “investment manager” or “management company”) is generally the company that provides portfolio management services to the fund. The investment adviser manages the fund’s investments according to the fund’s investment objectives and investment policies. In return for these services, the fund pays the investment adviser an investment advisory or management fee, which is a component of the fund’s expense ratio. Some funds may also have a sub-adviser to manage investments for all or part of the portfolio or for all investment decisions relating to a certain type of investment (such as international equities).
- The portfolio managers are the individuals who work for the investment adviser and make the day-to-day decisions about what investments to buy and sell. The prospectus generally will provide you with the name(s) of the portfolio managers and additional information such as their current title, prior work experience, and length of time with the fund. You should consider the potential effect of changes in portfolio managers when reviewing a fund’s past performance.
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.
- Buying and selling shares. Typically, funds will permit investors to buy and sell shares by check, wire transfer, or telephone, or by contacting a broker. Purchases and redemptions are made at the net asset value next calculated by the fund, in other words, the next net asset value per share that is calculated after receiving your order. A fund’s net asset value per share is the market value of the fund’s assets, minus fund expenses and any other liabilities, divided by the number of fund shares outstanding. Many funds calculate net asset value per share each business day at 4 pm Eastern Standard Time, which is generally when the New York Stock Exchange closes. Funds are required to pay redemptions within seven calendar days, but some funds pay redemptions within one or two business days. Some funds may also have minimum investment amounts to open an account or account balance minimums that shareholders must maintain to avoid paying account maintenance fees or having their account closed. Many funds will allow you to automatically invest in the fund by having money transferred regularly from your bank account to the fund.
- Dividend distributions. Typically, funds will offer several options for payments of dividends from the fund’s portfolio holdings. For example, many funds will allow investors to withdraw their dividends (typically by having dividends deposited in a bank account) or to automatically reinvest the dividends in the fund.
- Fund family exchanges. Many funds are offered within a family of funds and you may be able to exchange your shares in a fund with shares of another fund in the same fund family. In this case, exchanges can often be made with a telephone call or by providing instructions online, instead of having to fill out paperwork as would normally be required. An exchange might be subject to a small fee, and may require you to pay taxes.
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.
- The fund description will include information about the fund’s investment strategies and policies (for example, policies on borrowing and making loans and policies that the fund considers “fundamental”). Fundamental policies may not be changed without shareholder approval, and may include the fund’s investment objective.
- The disclosure about fund officers and directors will include their names, positions, length of service to the fund, and work history for the past five years. It will also describe the leadership structure of the board and the amount of equity securities owned by each director in the fund and in funds in the fund family that are overseen by that director.
- Other disclosures include information about service providers (including the investment adviser and underwriter), brokerage commissions, tax matters, and financial statements.
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. 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 2 of 3) – Contains information about the fee table and performance.