mutual fund prospectus

In this article we are going to take a look at the mutual fund prospectus. We will review all of the information you need to know about the use and content of a mutual fund prospectus. This information is critical to passing your exam.

What is a mutual Fund Prospectus?

The mutual fund prospectus is the official offering document for mutual fund shares, and it should be given to the mutual fund investor at or before the time of the sales presentation.

What is included in the mutual fund prospectus? 

There is a tremendous amount of information in the mutual fund prospectus and one of the first things that the investor needs to be made aware of is the investment objective of the fund. What is this particular fund trying to achieve? Is it a growth fund? Is it an income fund? Is it a fund that invests in any one particular industry, such as a sector fund? Investment objective of the fund is  the most important piece of information for the investor. The job of a registered representative is to make sure that he/she presents mutual funds to investors that offer portfolios that meet the investor’s objective. the information in the prospectus relating to the mutual fund’s investment objectives, Should be read carefully by both the registered representative and the investor in order to make sure that the portfolio is indeed suitable. 

What are the sales charges with the mutual fund?

Mutual funds, for the most part, charge investors sales charges to invest. Some are relatively low, and others are relatively high. The cost to invest must be disclosed to the investor in the mutual fund prospectus. This will let the investor know how much they are going to pay when they place money into that mutual fund.

Management expenses

In addition to sales charges, mutual funds also have management expenses. This lets the investor know how much it is going to cost the investor to have the mutual fund company manage their money.  the board of directors, investment advisor, custodian bank and transfer agent are all paid a fee for their services and go towards the management expenses incurred by the fund. The higher the expenses of the mutual fund, the lower the return to the investor. So some cost-conscious investors are going to want to read that information carefully.

Mutual funds offer a wide variety of services to investors. Some offer even check-writing privileges. Some have emergency withdrawal privileges and other features that the investor may want to take advantage of. All of the features and benefits of the mutual fund will be disclosed in the mutual fund prospectus as well.

Past performance data

Mutual funds are allowed to disclose performance data in the mutual fund prospectus. If the fund discloses the performance data of the mutual fund in the prospectus, the mutual fund prospectus becomes known as an advertising prospectus. An advertising prospectus is one that discloses portfolio performance information to the investor ss part of the official offering document.  If the mutual fund is going to disclose their performance, they must disclose their performance for one, five, and 10 years, or for the life of the fund. So if the mutual fund has been around for a very, very long time, the mutual fund company is only required to disclose one, five, and 10-year performance information. They may, at their discretion, elect to disclose information for the life of the fund. But at that point, it’s up to the  mutual fund company. If the mutual fund hasn’t been around for 10 years, the mutual fund would be required to disclose their performance data for one, five years, as well as the life of the fund, because it has not been around for that 10-year anniversary. The performance data in the advertising prospectus should show the performance of the mutual fund relative to a graph of what the stock market has done over that same period of time. The mutual fund company is required to include a graph showing the performance of the portfolio, contrasted with a graph of a relevant index that is most closely tied to that mutual fund portfolio. This allows the investor to ascertain whether or not the mutual fund provided relative outperformance to the market as a whole or relative underperformance to the market as a whole.

Mutual fund profile sheet

An investor may be presented with a mutual fund profile, and that may be the basis for an investor making a purchase into a mutual fund when a registered rep sits down with them to make the recommendation. A couple of caveats here– this mutual fund profile must contain all of the pertinent information that is most relevant to the investor, things like sales charges, investment objectives, expenses, and performance information. Additionally, the mutual fund profile must direct the investor to where they can obtain a mutual fund prospectus.

So for test purposes here, there are two ways to answer the following question. When must a prospectus be given to a potential mutual fund investor? The best answer is  at or before the time of the sales presentation. However, if the mutual fund profile appears somewhere in that answer key, there could be a correct answer in there that says the mutual fund investor could be provided with a mutual fund profile and a link to obtain a full prospectus. So a few things there on your test you’re likely to see, and make sure you have a good understanding of some of these concepts we’ve covered relating to the mutual fund prospectus.

Statement of additional information

Believe it or not, the  information contained in the mutual fund prospectus is not all the information that is available to the investors. The mutual fund prospectus is actually what they call a summary prospectus, meaning not everything is in there. An investor may request a statement of additional information if they want to read more about this potential investment prior to making an investment. The statement of additional information will contain some more specifics and more particulars regarding the mutual fund operations and its holdings. It will provide detailed information regarding the securities held in the portfolio, and it will provide the investor with a balance sheet and an income statement for the investment company itself. The statement of additional information will also disclose the assets and liabilities of the mutual fund company. This information can be found on the balance sheet. The income and expenses of the mutual fund company will be disclosed in the income statement. The portfolio turnover data telsl an investor how often the mutual fund trades its portfolio, This is important for a few reasons to many investors. The more often a mutual fund trades its portfolio, the greater its expenses, and the greater the tax implications to the investor. So the portfolio turnover data is going to provide the investor with information regarding the expenses and the tax consequences of investing in that fund. The higher the turnover rate, or the higher the turnover ratio is, the greater the costs and potential tax consequences. If a mutual fund has a turnover rate of 25%, that would indicate to the investor that the mutual fund company has replaced its entire portfolio every four years. So if they turn over their mutual fund portfolio 25% per year, they would have a brand-new portfolio every4  years. If the mutual fund had a turnover rate of 100, or 1, they would renew their portfolio every year. The mutual fund would have an entire different group of holdings at the end of each year. And certainly you can see where that could be expensive, with commissions and execution costs. And you can see where that could very well have significant tax implications for some investors. The statement of additional information will also provide more detailed information about how and when the board is paid, and how and when the investment advisor is compensated for their services. The investment advisor receives a percentage of the net asset value of the fund as their fee for providing their advisory services.

Updating a mutual fund prospectus

All mutual fund companies are required to update their mutual fund prospectus regularly. A couple of specifics relating to the mutual fund prospectus. A mutual fund prospectus should be updated every 12 months. It should be. That’s what the industry would like the mutual fund to do. The mutual fund company must update their prospectus every 13 months. So under no circumstances can the mutual fund go more than 13 months without updating that prospectus.

A registered representative can use a prospectus for up to 16 months. And after 16 months, that prospectus should be discarded.  to recap the rules, the mutual fund prospectus should be updated every 12 months. It must be updated every 13. It can be used by a rep for up to 16. And after 16 months, it should be thrown away by the brokerage firm.

The date that is used to determine 12, 13, and 16 months, is the date of the financial information inside of the prospectus. 

We hope that this article has helped you  better understand the requirements regarding the use of a mutual fund prospectus.

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Good luck on your exam!

 The Securities Institute of America