Making Sense of Mutual Fund Reports


If your attempts to examine the prospectuses and shareholder reports you get from mutual fund companies have left you cross-eyed, confused and wishing for "CliffsNotes," don't toss them into the recycle bin just yet.

Like a student who knows how to pick out just the parts of a lesson that are going to be on the test, you can extract the essential content from these documents with a little guidance and without having to digest them whole.

Federal law requires that all mutual funds provide a free prospectus and shareholder report to every current or potential investor.

New summary on the way
The prospectus describes the fund's goals and objectives, lists the fees and expenses that are associated with the fund, explains its investment strategies and risks, and tells you how to buy and sell shares. Annual and semiannual shareholder reports give an account of the fund's recent performance.

The fund prospectus will get simpler soon. In November 2008, the Securities and Exchange Commission, or SEC, approved a new requirement for mutual funds to begin providing a user-friendly summary prospectus. The result of 15 years of effort, according to the Investment Company Institute, the rule took effect Feb. 28, 2009, and all funds must be in compliance by the end of 2010.

"It's going to be a shortened version and it's going to carry the key components -- the investment objectives, strategies, risks and costs," says Sarah M. Place, president and CEO of Place Trade Financial in Raleigh, N.C.

The SEC expressly requires the summary prospectus to use clear, jargon-free language. "That's actually written into the statement from the SEC: 'Funds will be required to provide the summary information in plain English and in standardized order,'" says Place, reading from the rule. The full prospectus will still be available online or in paper form by request.

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Jim Saulnier, an independent Certified Financial Planner in Fort Collins, Colo., expects the new format to be a welcome change to clients who tell him they hate getting swamped with thick paper documents.

"Maybe the SEC is embracing the green movement here and saving some of the trees that might be used in printing prospectuses," Saulnier says.

Know your goals, risk tolerance
Even when summary prospectuses become available, Place still advises getting a copy of the complete version and reading it. But neither the full nor the condensed version will make much sense unless you first get a clear understanding of your own investment goals.

"I tell the class that I teach, 'Before you read any prospectus, you want to know why you're investing and what your risk tolerance is,'" says Bob Mecca, a Certified Financial Planner who is principal of Robert A. Mecca & Associates in Prospect, Ill., and author of the e-newsletter, "Mecca on Mondays."

"Let's say that somebody is investing in an IRA. It's a long-term investment of several years, and they are a moderate risk taker. When they read the prospectus, if it's aggressive, small-cap, high-turnover, they just reject it and go to something else. You cannot read a prospectus without first understanding yourself."

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