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Mutual Fund Reports

Mutual Funds

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Mutual Fund Reports have 3 specific documents that you can use to determine if the fund is going to meet your investment needs. Funds are required to release a fund prospectus, annual financial report, and statement of additional information. These documents explain essentially everything you need to know about the fund.

Used appropriately, these 3 documents will help you pick the best mutual fund for your portfolio. You should always request all three documents when reviewing a mutual for investment. Study as much as you can before investing. Fund literature’s key benefit is the summaries of fund’s strategy, fees, and operations. You can use them to compare the costs, risks, and potential volatility of multiple funds. Afterwards it will be far easier to rate the funds according to your needs and select the best mutual fund available.

Mutual Fund Reports: Prospectus

The prospectus is an official document required by regulators. It lists the fund’s investment objectives, management’s operational privileges, fund shareholder’s rights, and types of investment allowed. Since the prospectus reveals the fund’s goals you can also use it to derive risks and a reasonable idea of potential returns. This will explain if fund strategy compliments your existing portfolio. A fund must deliver a prospectus to all requesting potential investors. It is usually provided by your broker, financial planner, financial advisor, or the mutual fund’s website.

The prospectus also displays variances in share classes. Each share class can have different benefits. Switching share classes can change reinvestment rights, redemption rights, expenses, and fees. If you are considering buying a fund’s shares, compare share classes to ensure you are acquiring minimal fee disadvantages and maximum shareholder’s rights. You will also want to determine if these rights and fees change based on the source of purchase. It makes little sense to purchase a share class if another provides lower annual fees, lower commissions, and more shareholder’s rights.

Most importantly, the prospectus displays prices the fund charges. The prospectus will state the front end load, back end load, annual operating expenses, and annual 12b-1 fees. The front end load is the percentage of the original investment charged for entering the fund. The back end load is the commission removed from investor’s holdings when cashing out of the fund. Annual operating expense is the yearly charge of assets under management. Investor’s holdings are annually reduced by that amount, and additionally by the annual 12b-1 fee. Pay careful attention to this section when reading a prospectus. It will determine how badly your returns are diluted.

Mutual Fund Reports: Statement of Additional Information

The Statement of Additional Information is a highly beneficial document which elaborates on several issues that may not be clear in the prospectus. The document is provided for an investor on their request, but it is rarely ever provided by default. To receive this statement simply call, email, or mail the mutual fund and request this document. You can also contact your broker and ask for the statement to be provided. The statement provides information about fund investments, fees plus commissions the fund pays, directors and officers of the fund, and financial statements.

A statement provides you with a complete list of financials for the previous year, which allows you to determine how the fund uses investor provided finances. A list of investments owned is also provided. Note that this is a snapshot from a specific time period, usually the end of the previous year. It is not updated to the date of the investor’s request. You can still use this list to determine how well the fund’s management achieves its stated goals in the prospectus. Your primary purpose is to match investments to the objective. Determine how well investments match the prospectus’ stated goals for investment, risk, and return. Are these investments likely to match the rate of return and the risk profile the fund says they’re trying to achieve? Do their goals match with the needs and objectives of their stated purpose? Do these investments fit what you need in your portfolio? If you are unsure, look at other funds to see if they have investments that more accurately fulfill your goals or portfolio.

You are also informed about directors and managers who are running the fund with your finances. Since these people are directly in charge of your investment, it’s logical to learn about their credentials, qualifications, and history. This allows you to research their history beyond the fund to determine if you are comfortable handing these people your money. If you find undisclosed complaints, legal offenses, or fraud in their historical timeline, you can act accordingly. You will also receive notifications of their personal assets placed into the fund. If there aren’t any personal investments, then you should probably be concerned. It’s best when a management team has its own skin in the game. They will avoid carelessness to avoid damaging their own personal wealth. If management is not invested in their own fund, they only receive their paychecks from operating expenses. They incur no damage from losses to their net worth beyond reduced future paychecks, or possibly their current job. They still walk away relatively intact from a crisis and can afford to be slightly careless. You cannot afford it.

Lastly, the statement of additional information will inform you of fees and commissions paid by mutual funds to third parties. Expenditures paid by the funds to various brokerage accounts will be revealed. They are not included in operating expenses, even though they reduce the amount of money in their fund’s brokerage accounts. Any costs come out of your return. You should compare the fees and commissions paid to the turnover of the fund. Turnover is the rate that a fund trades investments. Every time they buy or sell investments they are charged fees or commissions. A higher turnover equates to more payments for trading commissions or fees. A lower turnover equates to less payments. A high turnover fund paying large amounts of fees or commissions will have significant performance drag compared to a low turnover fund when they have equal investment returns.

Mutual Fund Reports: Annual Financial Report

The Annual Financial Report displays the funds finances for the past fiscal year. This statement usually is released during the January or February period. It relates the operations of the fund with their financials, giving you a year end snapshot of the funds finances and the rationale behind them. All of this is provided to you using text, charts, and other images.

The primary purpose is found in the sections of the report containing financial information. Ironically, they will probably be towards the back of the report. The documents you specifically want are the financial statements, financial statement notations, auditor’s report, and summary of the financial information. These statements will give you the financial condition of the fund, which should be relatively stable. You should still view the fund’s financial statements from the position of a financial analyst to determine if you can find potential problems. Funds are technically still investment companies, meaning that they are forced to deliver Balance Sheets, Income Statements, and Cash Flow Statements which you can use to analyze them as investments.

The annual financial report also contains features a breakdown of management’s decisions and their effects. Reading this section will provide you with insight on what occurred, decisions they made, the reasons they made them, and the result of those choices. It provides an important window into management’s critical thinking and rationality skills. This section will help you judge if you can trust management’s skill at investing.

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