It’s Getting Information on Those Mutual Funds and ETFs Before You Buy.

The next step, after you’ve used RITA℠ to score and rank the mutual fund and ETF choices and have tentatively decided which of the top scoring and ranking funds you think might be best for you, is to get a copy of the “prospectus” for each of those choices. The prospectus can help you learn about those funds, the teams managing them, their investments, what share classes are available (you’ll want the cheapest of those available to you), and more.

This step is also referred to as doing your “due diligence,” and it’s always an advisable “next step” before you decide to purchase any mutual fund or ETF.

So, what is a “prospectus?”

A prospectus is a legal disclosure document that the U.S. Securities and Exchange Commission (SEC) requires be given to investors before they invest in a mutual fund, ETF, or other security. It describes that mutual fund and/or ETF and contains facts about the company operating and offering it, all of which are intended to help investors better understand what they are buying and make an informed decision about whether to purchase it.  

A review of a mutual fund’s or ETF’s prospectus will help you better understand the mutual fund’s investment strategy, the asset class into which it best fits (as described by the fund), and the risks associated with it.  Importantly, it will also explain the various share classes which are available, how much the annual fee (“Expense Ratio”) is for each, and a description of what qualifications are needed to be able to obtain shares within each such share class.  You’ll typically want purchase the least expensive share class for which you are qualified.  In other words, the purpose of a prospectus is to help complete your evaluation of whether a particular mutual fund or ETF is right for your needs, goals, and risk tolerance (after your scoring ranking, with RITA℠ , has helped you narrow your choices).

How do I get a prospectus for each mutual fund or ETF?  One way to do this is to visit the mutual or ETF company’s website, where they are frequently available in a downloadable PDF format.  Another way to do so is to go to this part of the Securities and Exchange Commission (SEC) website: https://www.sec.gov/edgar/searchedgar/prospectus.  There you will see several ways you can find the prospectuses which you are seeking, including by company or mutual fund name, ticker symbol, and more.

Now that I have the prospectus, how should I read it?  What am I looking for?  A mutual fund or ETF prospectus details the investment strategies and objectives of that specific mutual fund or ETF (including any restrictions the fund may place on its investments) and will include its past performance (which you’ve already used, in RITA℠ , to narrow your choices), as well as information regarding the investment management team of the fund and their history.

The prospectus must include information regarding the risks involved in investing in the fund.  While you may have already used some of the fund’s risk factors in narrowing your choices, there are others.  Possible disclosures of litigation and/or government investigations, for example, might be important in your decision making.  So, it’s worth taking a close look at the “Risks” section. 

This prospectus is really long?  Do I really need to read every word before making a decision to buy?  The short answer is “probably not” and it’s likely that you will not even if you were advised to do so . . . you’re right, they are typically very long (and boring).  But you should at least go through the document with an eye out for what might matter to you.  For example, does the fund’s investment strategy (and any self-imposed limitations on the fund’s investments) align with what you are hoping to achieve?  Is there any specific risk disclosed that is of concern to you?

Once you have done so, you can more confidently make a buy decision regarding that fund or you can decide not to and move on to repeat the process for one of the other high scoring funds that you’ve identified with RITA℠ .  It’s the narrowing of those choices and the huge amount of time that it saves you, in limiting this potentially time-consuming due diligence review to only the top two or three choices, that makes RITA℠  exceptionally valuable, even beyond potentially better investment results. 

How valuable is your time and how much is the increased confidence you will have in your investment-related decision-making worth to you?  We’re pretty sure that both are worth way more than the annual cost of RITA℠ .

By Eric Smith, J.D., CEO of DTC, and President (and an investment advisor representative) of Trustee Empowerment & Protection, Inc., a SEC-registered investment adviser