Understanding a Mutual Fund Prospectus

   This might sound cynical but it's true. They don't look after your money for nothing. Even true no load funds will pick up their slice from somewhere. Unfortunately with most funds, once they've taken their slice, there's not much left for you. At least with a good offshore fund, if the taxes are minimal or zero, there's a bigger pie to get their slice from. So even if their slice is bigger because of an extra performance bonus, your slice is bigger too.

   Anyway the mutual fund prospectus gives you the chance to compare the size of the managers slice (what it will cost you) against the size of the pie they can achieve (the fund performance).

   Every mutual fund has a prospectus which outlines in the most confusing, boring and long-winded way possible the funds investment objectives strategy, costs, risks and other legalese. This is because a mutual fund prospectus is actually a legal document. It forms part of the contract between the investor and the fund. Onshore funds make these freely available through a phone call or internet download. Click on this link to have a look at a typical mutual fund prospectus .

   Offshore funds are a different story. In the G8 countries, offshore funds are prohibited from advertising and even sending a mutual fund prospectus to residents of those countries. Today, prospectuses are often available over the internet but you might only be able to actually invest in an offshore fund through an offshore trust or company structure.

Costs

1. Costs of buying and selling shares in a fund - these are called transaction costs and are often termed as loads

   A 'load' fund charges you a sales fee (commission) for the shares bought.

   A 'no load' fund charges no commission but the management fees will probably be higher.

   * A 'front-end' load is where you pay the fee initially and the balance of your investment gets invested - this is the sales fee to buy into the fund.    * A 'back-end' load is simply a sales charge that is deferred till the end of the investment. It is also called a redemption fee or deferred sales charge. Generally the fee you pay reduces with each year you stay in the fund until the fee is 0%. For instance, if you withdraw in the first year you might pay a 5% fee. Withdraw in the second year and you pay 4%. Withdraw in year 6 and you pay no fee.

   Transaction costs also cover the costs to reinvest your distributions back into the fund and any exchange fees. The exchange fees are for moving money from one fund to another within the same fund group if you decide you want to switch your money over into another fund. They are also referred to as switching fees.

   If the fund is not charging you transaction fees then it is bound to be getting its slice of you through operating expenses fees. These comprise three elements:

   - the 12B-1 fee
   - the management fee
   - other operating fees

   Each of these is measured as a percentage of the funds average net assets for the year. They are charged annually.

   The 12B-1 fee covers the costs of marketing the fund. Funds are allowed to charge up to 1% of assets per year. Offshore funds can reduce this significantly because they don't produce the huge quantity of glossy brochures and reports and mutual fund prospectus that onshore funds do. They also don't advertise like onshore funds (because they are prohibited from doing so).

   The management fee goes to the fund managers for making those investment decisions about where to invest your (the funds') money and when to buy and sell.

   The other expenses cover the day to day operating costs such as administration, keeping records, filing, providing customer service.

   Consider comparing your funds annual expenses to the Vanguard S&P500 Index expenses which run to about 0.2% of assets. If a fund can get this low it is doing well by you. The S&P500 is the generally accepted benchmark for equities.

Fund Management

Investment Strategy and Objectives

   This is where you find out how they're running the show. It covers what they're aiming for (objectives) and how they intend to achieve the objectives (the strategies).

   You will find out if the aim is stable income with little risk or aggressive growth with high risk or anything in between including combinations of income and growth. While the mutual fund prospectus won't give fund holdings in detail it will give some idea of market sectors to be invested in and in what proportions.

   You will find, however some details on financial information going back several years. This may be in a section on Financial Highlights or Past Performance. It is usually in the form of a table.

   An important figure to note in a mutual fund prospectus is the total return. This is the percentage return for the year assuming all distributions are reinvested. This is the best number to use in comparing fund returns, as long as you keep in mind that, while it takes annual management expenses into account, it DOES NOT factor in transaction charges.

Ratios and Supplementary Data

   In this section of the mutual fund prospectus you will find the ratio of expenses to average net assets (the only expenses NOT included are the loads.) Try to find funds with an expenses ratio less than 1%.

   Another ratio (net investment income to average net assets) gives the annual dividend yield.

   The portfolio turnover ratio indicates how much buying and selling occurred. If this is high (say over 80%) then most portfolio investments are not being held for long. A rate of 100% would mean the whole portfolio has changed in the course of a year. Depending on the investments this may not be a bad thing (if they were very high gain investments) but the higher the rate the higher the transaction costs.

   The turnover rate is a reflection of the fund manager's investment style. With onshore funds it is also an indicator of tax considerations. Short term holdings will result in a higher capital gains tax component in the distributions.

Other information

   The mutual fund prospectus will also cover a lot of other miscellaneous information such as voting rights, disclaimers, notice of risk and risk management, taxation, distribution policy, contact and complaints and how to buy and redeem investment in the fund. Now that you have an understanding of the mutual fund prospectus you are in a better position to actually check out some of the world's top performing offshore funds.

You are here:
Understanding the Mutual Fund Prospectus - an explanation of some of the main things to look for when reading a prospectus.

Mutual Funds - An explanation of what they are.

Mutual Fund Investing - How funds make money, how you make money from them, explanation of distributions and some special dates.

Offshore Investing Mutual Funds - an outline of why offshore funds beat all, and a bit about taxation.

Advantages - a discussion of the advantages and the disadvantages of these funds.

Types of Mutual Fund - a listing and explanation of all the different types of funds onshore and offshore.

Offshore Investments - how to go about making your offshore investment through an offshore trust.

Choosing a Mutual Fund - 6 important things to consider before making your decision to invest in a particular fund.

Compare Mutual Funds - how to analyze what the 1 year, 3 year, 5 year and 10 year returns mean, and how to compare funds with those figures.

Mutual Fund Managers - A very comprehensive list in alphabetical order of many of the managers of mutual fund families around the world.