Mutual Funds: Final Tips & Red Flags

Read the Prospectus

Here are the most important sections of the prospectus that you need to read for any fund you are considering buying:

important info! Funds of the same type can have significantly different risks, objectives and policies.

More Tips About Fees & Expenses

Always check the fees and expenses table in the prospectus. Here are some scenarios you do not want to get caught by:

  • Be wary of a salesperson or ad that says “This is just like a no-load fund.” Even if the fund does not have a front-end load, there may be other loads or fees. Always check the fee table in the prospectus to see all the fees.
  • Some of a fund’s fees or expenses may have been waived. If so, the fees and expenses may increase suddenly when the waiver ends. Check the section after the fee table in the prospectus to see by how much.
  • Some funds let you exchange your shares for shares of another fund managed by the same adviser. Look for any exchange fee. If there is one it will be listed in the first part of the fee table.

Shop wisely. Compare fees and expenses before you invest.

Derivatives & Mutual Fund Investing

Some mutual funds invest in derivatives. These types of funds may face special risks.

Derivatives are financial instruments whose performance is based, at least in part, on the performance of an underlying asset, security or index. Their value is not derived from the trade or exchange of the the asset itself.

There are many types of derivatives with many different uses.  One example of a derivative is a futures contract.

The performance of derivatives, and thus, any fund that uses derivatives, may or may not correspond to the behavior, or performance of the underlying asset.

Without getting bogged down in derivatives, the reason derivatives matter to an investor in mutual funds is because with a mutual fund that uses derivatives, its value can be affected dramatically by even small market movements, sometimes in unpredictable ways.

Derivatives do not necessarily increase risk, and may in fact reduce risk. A fund’s prospectus will disclose how it may use derivatives. You may also want to call a fund and ask how it uses derivatives.

Additional Info From Mutual Fund Companies

You can get an explanation of a fund’s operations in greater detail than is in the prospectus. Ask for the Statement of Additional Information (also referred to as SAI, or Part B of the prospectus). The fund must send you an SAI if you request one.

A fund’s annual and semi-annual reports to shareholders can give you a clearer picture of the fund’s investment goals and policies. If you ask, the fund will send you these reports.

important info! Instead of waiting for reports from a mutual fund company, get the information online free including directly from the SEC.  Because these are digital documents, they offer the strong advantage of being searchable and you can copy-paste data into your own tracking spreadsheet.

Info About Mutual Funds From Other Sources

Libraries are a great resource for researching mutual funds. You will find investment books, investor magazines and newspapers. Some libraries even provide access to online content that requires a subscription.

Morningstar is a leading provider of mutual fund research and ratings. Their website offers free tools, ratings and information as well as in depth premium content for paid subscribers.

The Last Word on Mutual Funds

Remember: There are no guarantees in mutual fund investing. Inform yourself and exercise your judgment carefully before you invest.