What Is a Mutual Fund Prospectus?

How a Mutual Fund Prospectus Works 

A mutual fund prospectus is a document that provides investors important details about a particular mutual fund and the company that operates the fund. Mutual funds are required to send a prospectus to investors once they’ve purchased a fund, though investors can request a prospectus prior to investment as well.

Types of Mutual Fund Prospectus

There are two types of mutual fund prospectuses that differ based on how much information they provide.

Statutory Prospectus: A detailed document, including information about the fund’s investment objectives/goals, fees, risks and performance, management, shareholder information, and commissions, called a statutory prospectus is required to be delivered to all shareholders. 

Summary Prospectus: Most funds also produce a summary prospectus, which is a few pages long and contains more marketing language than legalese. You should analyze both prospectuses  before making a purchase.

How To Read a Mutual Fund Prospectus

To understand where you should be looking for information in a mutual fund prospectus, let’s go over each section in the statutory prospectus. There are primarily three parts to a statutory prospectus:

Part I : Investment Objective, Strategies, and Risks

Most funds focus on either capital appreciation (via increased stock prices) or income (via dividend or bond payments). This section of the prospectus will detail what strategy the fund uses to meet that objective. 

Since it is important for investors to understand whether the fund matches their risk profile, this first section of the prospectus also contains the risks associated with investing in the fund. 

Niche funds, such as those that concentrate in only a few stocks, will detail the additional risk investors may have with the fund. 

Part II: Fees Table and Performance

Think of this section as a cost-benefit analysis for the fund. It will lists out the fees and commissions associated with the fund while also describing the historical performance of the fund.

The fee section includes three parts: 

• Shareholder transaction expenses: These are expenses related to purchasing or selling shares in a mutual fund. They include both front-end and back-end sales loads, purchase fees, redemption fees, and account maintenance fees. 
• Annual fund operating expenses: These are expenses that a mutual fund charges for running the fund. They include the expense ratio reflective of the fund’s administrative costs, 12b-1 fees paid to brokers for selling the fund, and fund management fees.
• A hypothetical example: This example shows what investor costs would be in a typical year. 

The prospectus will also include a table and charts showing historical performance with comparisons to relevant indexes along with the statement that past returns are no guarantee of future returns.

Part III: Management, Shareholder Information, and Statement of Additional Information

The prospectus lists both the management company that advises the fund and the individual portfolio managers who are responsible for making investment decisions. 

Next is information on how the purchases of fund shares can be made, options for dividend distribution, and potentially information on how to exchange shares of a fund for shares of a fund in the same fund family.  

Lastly, the statement of additional information will typically include the portfolio managers’ resumes and time working with the fund, among other disclosures.

What It Means for Individual Investors

The mutual fund prospectus is the key document for researching a new potential mutual fund investment. Let’s go over some good practices to use in the most important sections. 

Investment Objectives/Goals

The investment objective gives you a glimpse into what the fund hopes to achieve and what risks it’s willing to take to meet those goals. While the investment strategy alone may not make or break your investment decision, it's good to keep in mind the objectives of the various funds you own. For example, if you already own three mutual funds that specialize in South American real estate, it may be a good idea to diversify with the next one. 

Fees & Commissions

Because of compound interest, a fee of even 0.25% can lead to a big change in investment results. Let’s say you have $100,000 that you can invest in a fund that earns 4% a year for 20 years. If there are no fees or expenses, your initial investment will grow to a little over $219,112. 

Here’s how any fee would impact that return:

Risks and performance

Risks are often written with boilerplate legal language that doesn’t change much from fund to fund. The key to analyzing this section is to find the risks that you don’t already understand. Country risks, concentration risks, or even issuer risks that you haven’t encountered before should be considered in your decision. 

It’s true that past performance is no guarantee of future results, but past poor performance could be a good sign that you’re better off with an index fund. If a fund consistently underperforms an index, it may be worth taking the time to see if you can just invest in the index. 

Frequently Asked Questions (FAQs)