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Saving & Investing - Head Matters


7. How to Invest

c. Comparing mutual funds

Each mutual fund has an “objective” that determines the types of stocks and other investments in which it invests. Mutual funds can contain all stocks, all bonds, or some combination of stocks, bonds and other types of investments. 

The fund objectives are stated clearly in the prospectus. The prospectus is the primary information source for a mutual fund. It is the most complete document investors have for researching a specific fund. By law, a mutual fund company must provide investors with a fund’s prospectus before it sells shares of the fund.  It is extremely important to read the prospectus carefully before investing in any fund.

The prospectus explains the fund’s investment objective, investment policies, risk profile, the fees it charges, who manages the fund, its historical investment performance and other important matters.  The following is key information in a prospectus:

The Risk/Return Summary is an “executive summary” of key information about a fund. It is designed to help investors evaluate a fund and compare and contrast it to others. The summary contains standardized information about the fund’s investment objective, principal investment strategies, risks, investment performance, and fees. This is the most important part of the prospectus to read.

The Financial Highlights Table shows the fund’s financial history in numbers. It is designed for investors who want to go beyond the fund’s historical investment returns to understand how the fund achieved those results. The table shows—using one fund share—how much the fund earned, how it was earned and how much it paid to shareholders. With so much technical information, it can be intimidating.

Investment Objectives and Investment Policies tells about the fund’s risk profile, which is the fund’s potential to make or lose money. Generally, the higher a fund’s risk profile, the greater the potential to make or lose money. The most important factor is the overall investment goal. The investment policies explain what methods and techniques will be used to achieve the goal. 

Fund Management and Operations describes the people who provide portfolio management and other services necessary to manage the fund. The skills of the investment advisor and portfolio manager are the primary determinants of how well a fund performs. The expenses related to fund management and operations are subtracted from the return of the fund so you should closely examine the expense ratio of the fund and look for a fund which has a low expense ratio.

Sales Fees are charged to mutual fund investors to pay the marketing costs of the fund. Funds charge these fees directly to the investor as a one-time fee or on an ongoing basis. Funds that charge these one-time fees are referred to as load funds; those that do not charge these one-time fees are called no-load funds

Portfolio Manager’s Letter to the Shareholders gives insightful information about the fund manager’s view of the market and economic events that affect the fund’s results including which investments were bought and which ones were sold in the past quarter. It may also include some commentary as to the fund manager’s outlook going forward.

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