Fund Basics For Newbies Part 3: How to Read A Mutual Fund Prospectus

Keen to invest in funds but not sure where or how to start?

Previously, we’ve covered the basics of funds investing, including why you should invest in funds, the risks involved and what an investor should look out for.

Today, we’re going a little deeper into how to decipher a fund prospectus.

What’s A Prospectus?

A prospectus is a manual for a mutual fund. It provides detailed information on a fund’s goals, its investment strategies, key risks, performance, distribution policy, fund management and all associated fees and expenses.

Granted, these documents can look pretty daunting. Well, it is still a legal document, so obviously it isn’t going to be an easy read. But there are ways to find out the essential information you need without poring through the entire document.

Perhaps you should start with 2 common objectives investors have when they are faced with a prospectus.

Find out:

  • How much potential returns the fund can make
  • Its performance history and what kind of strategies the fund managers are using to reach their projected returns

[image credits: Pixabay]

Where To Start

While each fund’s prospectus might be different in terms of their layout and how they present their information, there are certain sections that are mandatory to be included.

You should always start with the summary section that provides a very basic description of the fund or you can refer to the attached product highlight sheet for a quick overview.

Following this, prepare yourself to read more in-depth into the other sections:

1) Investment Objective

The investment goal of the fund will be clearly defined here. This can be preservation of the principal, long-term growth or high total return.

The investment objectives of a fund don’t usually change and it is important that it matches your investment objectives as well.

2) Investment Strategies

This part explains how the fund managers would invest the funds to achieve the investment objectives. It can include aspects such as the type of asset class they will invest in, asset allocation and perhaps the type of companies they will invest in.

3) Risks

As each one of us has a different risk appetite towards investments, it is important to ensure that you understand what type of risks you can be exposed to when investing in a fund.

Typically, the prospectus will highlight risks such as currency risk, index-replication risk, interest rate risk and tracking error risk.

[image credits: Pixabay]

4) Past Performance

Investors are always curious about a fund’s past performance as it can be an indication of the capability of the fund manager.

However, there are certain things you should look out for, such as the comparison with an appropriate benchmark and the type of returns you are looking at.

While total returns usually look impressive, looking at the average annual returns might present a more holistic view; and, remember to give more emphasis to nearer returns compared to those more than 5 years ago as well.

Also remember the caveat that past performance is not a guarantee of future returns!

[image credits: Pixabay]

5) Fees & Expenses

This section is extremely important since buying into a fund requires you to pay for the management fees, which can substantially eat into your potential returns.

6) Redemption

It is also important that you know how you can exit the investment when you want to. Look under the redemption of shares to learn about the cut-off time and costs involved for redemption of your shares.

Share this post

Lynette Tan

Lynette has more than six years of experience in financial analysis and writing, having stepped foot in the financial world as a commodities analyst. With a passion for personal investing and financial literacy, she hopes to help others gain investment knowledge by making investment concepts plain and simple for the man on the street.

No comments

Add yours