Getting Fund Information
The best source of information about any mutual fund is its prospectus. A prospectus contains information such as who is managing the fund, the type of investments it holds, its investment philosophy (such as whether it invests in US stocks, US bonds, foreign stocks, etc.), and the various fees and commissions it charges.
Just like stocks, mutual funds have their own symbols. The symbols of the biggest mutual funds such as the Vanguard 500 Index (Symbol: VFINX), USAA S&P 500 Index (Symbol: USSPX), and Vanguard Total Stock Market Index (Symbol: VTSMX) can easily be found on most financial websites . Using the symbol of an index fund, you can get information from mutual fund websites.
You can get mutual fund information from the same sites for stock information sites for stock information. Additional sites for mutual fund information include the following: The Vanguard Group, The Motley Fool, About, and The Mutual Fund Educational Alliance.
Getting Information On The Company
After you have identified a fund that you’d like to invest in, you will need to get basic information on the fund, a copy of its prospectus for more details on the fund, a summary of its investment philosophy, a list of its historical returns and other characteristics. You may want to start by going to an investment website such as Morningstar .
Because big fund companies such as Vanguard and Fidelity have so many funds, you must use the correct mutual fund name or the correct symbol to get the right information. For example, The Vanguard 500 Index and The Vanguard Total Market Index are different funds with different investment philosophies. Make sure you get the information for the correct fund. If you already have the symbol of the fund, you can go directly to the fund's site to get the prospectus which will give you all the details of the fund you'll ever want to see.
We obtained a copy of the Vanguard 500 Index Fund (symbol: VFINX) prospectus from the Vanguard website, www.vanguard.com. Sometimes, the prospectus of a fund will contain information about other funds as well. For example, the prospectus labeled “Vanguard U.S. Stock Index Funds” contains information about the Vanguard 500 Index Fund as well as the Vanguard Value Index Fund, the Vanguard Growth Index Fund, and six other funds.
What Is In The Prospectus?
We recommend that you read as much of the prospectus as you can. However, if you are short on time, there are four very important sections in most prospectuses that we recommend that you read. They are the sections on objectives and strategies, risks, performance, and fees and expenses.
We wil use the prospectus for The Vanguard 500 Index Fund for illustrative purposes only (we are not investment advisors so we can’t recommend this fund or any other fund), we will discuss the major sections of the prospectus. Get a copy of the latest Vanguard 500 Index Fund prospectus so you can follow along.
Investment Objective & Strategies
This section in the prospectus tells you the fund’s philosophy. If the fund you are considering is an index fund, you should refer to that index. For The Vanguard 500 Index Fund, the prospectus says that the fund looks to track the performance of The S&P 500 Index.
This is the section in the prospectus which warns you about the risks you may face as an investor in the fund. Read this section carefully so you know what you are buying. For The Vanguard 500 Index Fund, the risks are that the returns for large-cap stocks may not move in line with the returns from the overall stock market. As a mutual fund index investor, you are probably trying to exactly match the return of the overall market so the prospectus is warning you that the results may deviate from expectations.
In reality, however, the returns don't deviate much from the returns on the S&P 500. To show you how the Vanguard 500 Index Fund tracks the S&P 500, the following table shows the return on the fund over the 10-year period 1993 to 2002 compared to the S&P 500 returns of the same 10-year period.
This section shows the return on the fund. It often shows a comparison of the fund’s return to some market benchmark. In addition, it usually shows 10 years worth of annual returns. In the case of The Vanguard 500 Index Fund, the fund’s yearly return is shown as well as 1-year, 5-year, and 10-year returns which are compared to the S&P 500 returns. The prospectus shows that if you held the fund for a 10-year period ending on December 31, 2002, your annual return would have been 9.27%.
This is a very important section, especially when it comes to index funds. The fee table below for The Vanguard 500 Index Fund shows that the fund has no front-end load although there is an Account Maintenance fee of $10 per year if you are holding a mutual fund balance of less than $10,000. Box 13.7 shows a summary of the fees for the fund.
Expenses are paid annually from the fund’s assets. Ideally, operating expenses should be less than 1%. The yearly operating expense ratio for the Vanguard 500 Index is 0.18% -- pretty low in our books. An expense ratio less than 1% is a good thing.