Fees in a Mutual Fund Prospectus: Three Ways A Prospectus Deceives

(part 1 of 3)

This is the first of three prospectus pitfalls to watch out for.

You may have been thinking of jumping back into the market and buying some mutual funds. You know by now how the value of investments can drop drastically. But you may not know where to find all the mutual fund fees that will also reduce your returns on your investments.

Mutual fund fees are not always found in one place in a prospectus.

In How to read a prospectus, Neal Frankie, Certified Financial Planner, cautions the reader that all mutual fund fees may not be included in the “Fees and Expenses” section of a prospectus.

Frankie addresses the experienced investor who knows enough to avoid mutual funds with load fees and to watch out for penalty fees if the mutual fund is sold within 90 days after purchase:

“Don’t get too cozy yet. Every mutual fund investor in the galaxy is still subject to a second class of fees. These are fund expenses, which are paid out of the funds’ assets — even if the fund loses money. You don’t get a bill for these expenses, but the costs are taken out of the fund and it reduces the value of your account each year.”

Neal Frankie advises readers to read the whole prospectus to find all of these fees. For example, he uncovered an additional fee in the section in a prospectus called “Management of the Funds.” Under a subsection titled “Investment Adviser and Management Expenses” he found a fee for managers’ bonuses.

According to Frankie, some additional fees even show up in a supplemental publication to a mutual fund prospectus called a Statement of Additional Information (SAI).

In his discussion of the “Financial Highlights” section of a prospectus, Frankie also shows how taxable interest, capital gains, and turnover costs also affect the return you earn on your mutual funds

After reading Neal Frankie’s guest blog post on www.getrichslowly.org, I feel strongly that prospectuses should should be required to show all fees in one place!

Next time we’ll zoom in on the “Fees and Expenses” section of a prospectus for a closer examination. It holds two more major pitfalls to avoid.

Copyright © 2010 Nancy K. Humphreys