When it comes to getting the facts about a mutual fund, many investors may not know where to turn. With thousands of mutual funds to choose from, investors and their financial advisors require impartial, factual information to make informed choices. The most direct route to full fund disclosure is the mutual fund prospectus.
While the task of reading a mutual fund prospectus can be daunting given its size and depth of information, it is among the most useful tools available to help determine which fund best meets your investment needs and objectives. Mutual fund prospectuses tend to follow a standard format. With a little practice — alongside this "how to" guide — you can quickly become adept in scanning this all-important document's critical features.
In the following pages, we define the mutual fund prospectus; highlight and briefly describe the components that should be central to your investment considerations; and provide instructions on how to obtain a prospectus.
Questions to ask before investing
A mutual fund prospectus can help you answer the following questions:
- In what does this fund invest?
- Is the fund seeking income or capital growth?
- What has been the long-term rate of return?
- How much has return fluctuated in the past?
- How does the fund's performance compare with that of the underlying market?
- What time frame is appropriate for an investor in this fund?
What Is a Prospectus?
A mutual fund prospectus, also known as the fund's registration statement, is a legal document required by the Securities and Exchange Commission (SEC), the federal agency in charge of regulating the securities industry. Per SEC guidelines, mutual fund companies are obligated to provide investors with a prospectus before or upon completion of an initial investment in a fund.
The prospectus must disclose a fund's investment objective and strategies; that is, it must tell investors what types of securities the fund will invest in and how. It also outlines a fund's expenses, discusses sales charges that may be associated with an investment in the fund and explains investors' rights to redeem or exchange shares. The prospectus may also provide an illustration of the fund's historical performance.
The mutual fund prospectus has long held a reputation of being little more than a multi-page footnote — a minefield of legalese. But that changed in 1998 when the SEC mandated that fund companies adopt a "plain English" approach for their prospectuses. The rule requires issuers to write the cover page, summary and risk factors sections of prospectuses in plain English. The SEC also gave specific guidance on how to make the entire prospectus clear, concise and understandable.
The Statement of Additional Information (SAI)
In addition to the prospectus, all mutual funds must publish a supplementary document called a Statement of Additional Information (SAI). The SAI, also referred to as Part B of a fund's registration statement, offers further information about the fund. This includes information on the fund's history, additional fund policies, people who control the fund, investment advisories, brokerage commissions, tax affairs and performance procedures. Information in the SAI is not considered essential to helping investors make informed investment decisions. For that reason, fund companies are not required to provide the SAI at the time of or prior to a fund purchase. However, they are required to make the SAI available to investors free of charge upon request.
Components of a Mutual Fund Prospectus
A mutual fund prospectus comprises several sections, providing investors with important information on the fund to help determine if it aligns with their investment goals, time horizon and risk tolerance.
Date of Issue: When reading a mutual fund prospectus, check the cover of the document for the date of issue. All mutual funds are required to update their prospectuses at least once a year. Investors should ensure they have access to the most recent version.
Investment Objective: As seen in the Fund Overview illustration, the fund's investment goal is among the first key details provided within the prospectus. This allows prospective investors to become acquainted with the fund before they decide to invest, and ensure that the fund's goal matches their personal investment goal.
Investment Policies/Strategies: Typically following the investment objective are the fund's investment strategies, an overview of the investment managers' policies for choosing individual securities. Here, you will find some key definitions (e.g., what constitutes a small-capitalization company) and limitations (e.g., how much of the fund's assets can be invested in foreign issues).
Risk: All prospectuses must provide information on the key risks investors may encounter by investing in a given mutual fund. Some funds are riskier than others, but investors should remember that there are no guarantees when it comes to investing, and that every investment involves some level of risk.
Performance Data: In the Performance Data section, prospective investors can evaluate the fund's historical performance, how much returns have varied and how its results compare to the broader market. Average annual total returns are displayed within easy-to-read charts and tables, usually showing results for the most recent 10 calendar years, as well as for the most recent 1-, 5- and 10-year time periods. The return tables are standard as set by SEC guidelines, making it easy to compare across funds. Of course, past performance is no guarantee of future results.
Fund Fees and Expenses: The fees and expenses tables (see example below) also require careful scrutiny. These tables show investors how much of their investment will go to sales charges and how much of their fund earnings are being deducted in order to cover management fees and expenses. Investors should discuss this information with their financial advisors for advice and direction on whether a fund is right for them.
Management of the Fund: Investors want to know who is in charge of their dollars. The prospectus provides an introduction to the investment adviser of the fund and the individual portfolio managers assigned to its day-to-day management.
Financial Highlights: A summary of financial highlights helps investors to understand the fund's financial performance for the past five years. These comprehensive tables, one for each share class, cover everything from net income/losses and total fund expenses to portfolio turnover ratios.
Fund Policies and Programs: Every mutual fund family will have different minimum investment requirements and exchange privileges (i.e., the ability to exchange shares of one fund for shares of another within the same fund family). The prospectus will outline these, along with other important policy information.
Investor Services: Fund families may offer services such as an option to automatically reinvest proceeds from their investment into additional shares, or systematic withdrawal programs (SWP), which pay investors specific amounts at fixed intervals.
|Sample Fees & Expenses Table|
|Investor A Shares||Investor B Shares||Investor B Shares||Institutional Shares||Class R Shares|
|Shareholder Fees (Fees paid directly from your investment)|
|Maximum Sales Charge (Load) Imposed on Purchases (as percentage of offering price)||5.25%||None||None||None||None|
|Maximum Deferred Sales Charge (Load) (as percentage of offering price or redemption proceeds, whichever is lower)||None||4.50%||1.00%||None||None|
|Annual Fund Operating Expenses (Expenses that are deducted from fund assets)|
|Distribution and/or Service (12b-1) Fees||0.25%||1.00%||1.00%||None||0.50%|
|Total Annual Fund Operating Expenses||1.10%||1.95%||1.94%||0.79%||1.43%|
Obtaining a Prospectus
Prospectuses are provided directly by the investment adviser of the fund. In all cases, an investor should receive a copy of the prospectus at the time he or she purchases fund shares, usually as an accompaniment to a purchase confirmation statement. Generally speaking, whenever a fund is promoted or made available for sale, that offer must be accompanied by information on how to obtain a prospectus. Most often, prospectuses may be requested by phone, downloaded from a website or obtained through a professional intermediary, such as a financial advisor.
The BlackRock Prospectus
In 2008, BlackRock made several changes to the format of its fund prospectuses. In addition to grouping similar funds into a single prospectus, resulting in fewer mailings and potential cost savings, efforts also were made to enhance readability. The redesigned prospectus provides a clearer description of BlackRock funds' investment strategies and risks, as well as various options available to investors for purchasing, exchanging and redeeming fund shares.
This material is provided as an educational tool and is not meant as an investment recommendation. The information contained in this material is in part derived from third-party sources deemed reliable, but BlackRock does not guarantee the completeness or accuracy of the information.
You should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. A mutual fund's prospectus contains this and other information about the fund, and is available by contacting your financial professional. Information on BlackRock funds is available by calling 800-882-0052. The prospectus should be read carefully before investing.
BLACKROCK, BLACKROCK SOLUTIONS, iSHARES and SO WHAT DO I DO WITH MY MONEY are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
Prepared by BlackRock Investments, LLC, member FINRA.