Mutual Funds
More Light is Shed on Mutual Funds
Increased disclosure about mutual funds may give investors
more information for their decisions.  

A prospectus for a mutual fund describing that fund’s objectives, financial statements, and history
probably doesn’t sound like a fun read to most people. But a prospectus is an important document that
adds detail and helps potential investors become more informed when making investment decisions.

The added information has made a wealth of knowledge available on many mutual funds. This
knowledge can potentially add to the confidence of an investor, should one take the time to get to know
their mutual fund.

Even Congress has jumped into the mix. In 2005, Sen. Daniel Akaka from
Hawaii proposed the Mutual Fund Transparency Act, which would call for
increased disclosure of mutual fund fees, as well as taking a more critical look
at mutual fund advertising. While the bill was referred to committee, it signaled
an increasingly watchful eye being focused on mutual funds by Washington.

So what are some of the latest areas of mutual fund disclosure to be affected?

  • Holdings – In 2004, the Securities and Exchange Commission (SEC)
ruled that mutual fund companies must post their portfolio holdings every
quarter through the SEC’s Electronic Data Gathering, Analysis, and
Retrieval System, known as EDGAR. This allows mutual fund investors
to find out if, and how, the fund is following its stated investment

  • Fund Manager Compensation and Holdings – Fund managers are
required to disclose how they are paid, and by fully knowing how the fund
managers’ pay is structured, you can consider if their objectives and
plans are similar to your own. Fund managers now must also disclose
how much they have invested in the fund, within a certain dollar range.

  • Fees – Also in 2004, the SEC decided that mutual fund companies must
disclose the amount of fees they charge per $1000 invested, as well as
per $1000 invested assuming a hypothetical 5% gain. The increased
transparency allows investors to compare fees to other mutual funds and
decide if higher fees translate to performance.

  • Breakpoints – The SEC wants mutual fund companies to do more to
inform investors of potential breakpoint discounts on large purchases.

These are just a few of the many disclosures and transparencies that are
being encouraged or required by the SEC. The increased regulations are expected to continue in an
effort to provide more information to investors.

To know every small detail of a specific mutual fund is a tedious task, but it is one that many financial
professionals perform in order to give their clients informed recommendations. While you, as an investor
aren’t expected to know everything, it does help to know that the extra information is available and more
readily accessible than ever before. In the end, the more knowledge you have of your investment, the
more confident you’ll be of your choice.
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