Help Deciphering Mutual Fund Information is On the Way


Pity a poor traveler getting directions from somebody who works in the mutual fund industry. When writing down the directions, the mutual fund worker probably will use an an entire pack of self-stick notes, filled with disclaimers about loss of life, and other remote possibilities.

It's not that folks in the mutual fund business failed English. Rather, they must make sure that they are not unduly exposed to lawsuits and that they comply with a myriad of state and federal laws about fully disclosing risks and other topics. The result is that in many mutual fund prospectuses, there is page after page of legal ramblings, nearly all of which is ignored or too complex to understand. Securities & Exchange Commission Chairman Arthur Levitt recently went so far as to say that the concept of full disclosure has become "convoluted."

Chairman Levitt is a key proponent of clearer writing in the mutual fund business and has singled out T. Rowe Price, Fidelity and other fund families for their attempts to make information clear and understandable. Indeed two years ago, he proposed that mutual funds come up with a "profile prospectus," which would have the basic information needed to make an intelligent investment decision. The mutual fund industry recently issued a report which found that the profile prospectus is easier to read and preferred by investors. And it appears that it is only a matter of time before these shorter, clearer prospectuses become standard in the industry.

Bottom line: although the new prospectuses will be easier to read and use, it doesn't mean that investors shouldn't make additional efforts to learn everything they can about what they are investing in and what the risks are. That means reading the full prospectus, the quarterly and annual reports and information published by third parties, such as Morningstar.

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