Easy reading: New prospectus style
In the past, most people ignored them. Prospectuses were boring-looking documents, filled with small print and legalese, a great cure for insomnia. But recently, there have been significant improvements in the way prospectuses are put together and they are now crammed full of useful information. You toss them aside at your peril.
The new prospectuses are especially valuable in the specific information they provide about every fund being offered. Before you make any investment decision, you should read carefully the section on each fund in which you’re interested. Here are some of the key points you’ll find:
Registered plan eligibility: This should appear near the top. It will tell you whether the fund is fully eligible for RRSPs, RRIFs, etc. or must be treated as foreign content within the prescribed limits.
Investment objective: A brief description of exactly what the fund is designed to do. This should tell you at a glance whether it meets your broad objectives.
Investment strategies: A more detailed look at how the managers intend to achieve the fund’s goals. This section should tell you abouthe type of stocks the fund will buy (small, medium, or large companies); whether it will use derivatives and, if so, how; whether the manager will hold large amounts of cash under certain conditions, and more.
Top 10 holdings: You’ll be able to see at a glance what kind of companies the fund invests in.
Risks: This section should clearly define the risks associated with the fund.
Suitability: Here you’ll find a description of the type of investor for whom the fund is best suited. If you see a sentence like “You can accept high risk”, believe it. You are being warned about potentially large swings in unit values. If you don’t like taking on a lot of risk, that’s a red flag. Avoid the fund.
Past performance: Information about how the fund has done over time. This is useful to know, but don’t assume you can project such results into the future.
Distribution policy: Here you’ll find out how often the fund makes cash payments. If you’re investing for income, you’ll want at least quarterly distributions and perhaps monthly ones.
Financial highlights: Useful statistical data. Note especially the MER figures (management expense ratio) because they represent the annual cost of the fund to you.
There are two parts to this equation. One is the actual fee that’s paid to the management company. The other is the day-to-day operating expenses of the fund.
It’s not unusual for different funds within the same group to charge different management fees. In the case of any fund in which you’re interested, see if the numbers are trending up or down. An increasingly higher MER will have the effect of reducing net returns.
While you’re perusing the numbers, look also at net assets. These figures will tell you the size of the fund. Anything over $500 million is considered large in Canada; under $10 million is small.
You will also be able to see whether the fund is growing or shrinking in size. The latter could be a danger sign as it indicates either losses on investments or high redemptions which could force the sale of some of the fund’s securities to raise cash.
From Gordon Pape’s 2002 Buyer’s Guide to Mutual Funds, published in the fall 2001 by Prentice Hall Canada.