Once an investor makes a decision to purchase shares of a mutual fund, all aspects of the fund must be fully understood. Under the Securities Act of 1933, new issues of a security must be registered with the Securities and Exchange Commission and a prospectus must be provided to all purchasers of the new issue. Mutual funds are always considered a new issue, therefore; the requirement to provide a prospectus is continuous. A prospectus must be delivered to the purchaser prior to or at the time of the sale.
The different sections of a prospectus are listed and described below:
This section names the mutual fund and provides the purchaser with the address and the phone number of the fund. In addition, it gives an overview of what the fund objective and investment policies are and contains the SEC’s no-approval clause (or disclaimer).
Inside Front Cover
This section gives a hypothetical expense statement of the fund, showing the cost of ownership over one, three, five, and 10-year periods of time.
The next page gives a more detailed analysis of the objectives and investment policies and a list of investment restrictions.
Disclosures of Management and Advisory Contract
This section discloses the investment advisor , their location, principal duties and responsibilities, as well as the term of the contract. The management fee is usually found in this section as well.
Listing of Executive Officers and Directors
This section lists the executive officers and directors of the fund. Regulations state that the Board of Directors of a mutual fund shall not have more than 60% of affiliated persons on the board. This means that 40% of the board members consist of people who do not have a position or affiliation with the fund.
How to Purchase Shares of the Fund
This section describes how to go about purchasing shares of the fund. Orders received prior to the close of the exchange (4:00 p.m. eastern time) are executed, at the public offering price, as of 4:00 p.m. that same day. Orders received after the close of the exchange will be executed at the public offering price as of the close of exchange the next day.
How a Mutual Fund is Valued
This section describes how a share of a mutual fund is valued, when it is valued, and what the purchaser must pay for a share. (Calculated at net asset value per share (NAV), or the worth of the portfolio at the end of each trading day, on a per share basis).
This section describes exactly how sales charges are determined and what comprises the various percentages of the sales charges.
Redemption of Shares
This section describes the fact that a mutual fund shareholder has the ability to redeem shares of the fund. By law, mutual funds must be ready and willing to redeem shares that they issue, should the shareholder order a redemption. Redemptions take place at the NAV and payment must be made to the shareholder within 7 days.
This section describes the various reinvestment options available in regard to dividends and capital gains: reinvest in additional shares of the fund, or, dividends paid in cash and capital gains reinvested in additional shares of the fund, or, dividends and capital gains paid in cash.
Systematic Withdrawal Plan
This section describes a system that can be established so that the shareholder can receive a fixed payment, at a stated interval, from shares of the fund. This system primarily benefits those individuals who wish to withdraw a specific amount, in order to meet financial needs, while leaving the balance of the principle invested in the fund.
Dividends, Capital Gains Distributions, and Tax Status
This section describes how a fund will provide a statement each year describing the tax status of the funds’ dividends and capital gains distributions. The investor is not responsible for figuring this information.
The financial statements of the fund can be located in the final section. These statements usually consist of, but are not limited to: a listing of every security in the portfolio, statements of investment income and capital gains, the statements of assets and liabilities, and statements of any changes to the net assets of the fund over the last 12 months.
A prospectus contains the answers to most questions that an investor might have about a particular mutual fund. After having read a prospectus thoroughly and carefully, a potential buyer should have a detailed understanding of what makes up a mutual fund and how that mutual fund works. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].