Fund Facts About Mutual Funds

The Canadian Securities Administrators now (as of July 2011) require all Mutual Fund companies to provide a new disclosure document for mutual fund investors. These documents are called Fund Facts and they replace the simplified prospectus (although these are still available upon request if you want additional information).

Investors were previously provided with a simplified prospectus.  The main problem with the simplified prospectus was:

• It was given after the fund was already purchased (within 2 days).
• The dry writing and legal terms made it difficult for the average investor to read and understand it.
• Most investors filed it away without ever looking at it.

Fund Facts: Key Information You Should Know

Funds Facts sheets are a two-page summary of the key facts.  They are written in easy to understand, plain language and are accessible on mutual fund company websites.  They provide information for investors about mutual funds including a description of what each fund invests in, fund holdings, historical performance, risk rating and costs associated with buying, owning and redeeming the funds.

It is considered that these sheets are more likely to be read by investors and easier to understand than the fund prospectuses.

How much does it cost?  This section should be read first.  Look for low fees, but don’t make this your only consideration.  This section includes all mutual fund fees – MER, deferred sales charge, initial sales charge, cost to switch funds, trailer commissions and how much goes to the advisor.

Risk scale:  The risk scale is a 5-point scale that runs from low to high risk.  Such a scale is not really that helpful but it’s better than the traditional measures of risk that may not be understood by a typical mutual fund investor, such as Beta or standard deviation.  However, some broad equity funds and dividend funds are listed as having low-to-medium risk, which to me doesn’t seem appropriate for equities.

What do you own?  There will be a list of the top holdings of stocks and/or bonds that are held in the fund.  It doesn’t detail the percentage of each of the holdings in the portfolio.

Fund history:  There is a graph that shows the annual returns – how volatile has the fund been over the last 10 years.  It indicates how much your investment would have grown since inception and the annual compound return.  Don’t expect the fund’s quoted past performance to continue in the future.

Who is this Fund for?  Make sure you understand the objectives and strategies of the mutual fund and that they are consistent with you own objectives and risk tolerances.

Disadvantages of Fund Facts

The main disadvantage of Fund Facts is that they don’t show how the mutual funds compare to their peers or against the benchmark.  However, they follow a standard format so they can be easy to use for comparison purposes.  You need to visit sites such as Globe Investor or Morningstar to see how the funds have performed versus a benchmark.

Fund Facts do not provide any information on the manager’s trading strategy, portfolio turnover, and income tax details.

Conclusion

Ask your advisor why he or she is recommending the particular mutual funds and how they fit into your portfolio, as well as all applicable fees and expenses.

Because the fund company pays the salespeople, there is a potential conflict of interest.

Fund Facts provide a quick summary of some of the information you need to consider.  Do not rely on them solely to make your investment decisions.  You have to look elsewhere for more detailed information.