Mutual Fund Prospectus

A mutual fund prospectus is a document detailing the investment objectives and strategies of a particular fund or group of funds.
Mutual Fund Prospectus
3 min
04-June-2024

A mutual fund prospectus is a comprehensive guide for potential investors, offering essential details about the fund's objectives, strategies, and performance. This legal document outlines the risks associated with the investment upfront and elaborates on them further within the document. Additionally, investors can find information about fees, distribution policies, and the management team responsible for overseeing the fund's operations. With this thorough disclosure, investors can make informed decisions about whether the mutual fund aligns with their investment goals and risk tolerance.

What is a mutual fund prospectus?

A mutual fund prospectus is probably the most important document an investor must read before investing in a fund. It is the official document that fund houses issue to investors which helps them analyse whether investing in a given company is suitable for them.

How does a mutual fund prospectus work?

A mutual fund prospectus begins with a summary section that highlights the fund's investment goals, risks, and performance history. Amongst other things provides the following critical information related to any company:

  • Overview of the company, including its financial status and key executives
  • Total number of shares available for issuance
  • Nature of the security offered (e.g., stock, bond, mutual fund)
  • The financial institution managing the issuance process
  • Details regarding dividend policies and distributions
  • The fund's past financial performance

Fund houses must make the mutual fund prospectus available for investors after they buy shares while many make them available on their website. But you can also ask for a mutual fund prospectus before investing.

Examples of mutual fund prospectus

Here are the different types of mutual fund prospectus issued by companies:

  1. Equity Fund Prospectus: These documents focus on funds that invest in stocks, explaining the market sectors and types of stocks that are preferred.
  2. Bond Fund Prospectus: This prospectus highlights investments made in government or corporate bonds, detailing the bond duration and credit quality.
  3. Balanced Fund Prospectus: This one describes the strategy of diversification by highlighting how the fund allocates assets between stocks and bonds.
  4. Index Fund Prospectus: Details the index the fund aims to track, explaining the methodology of mirroring the index's performance.

Types of mutual fund prospectus

Broadly speaking mutual fund prospectus is of two types. They differ based on the amount of information they deliver:

  1. Statutory Prospectus: It is mandatory to deliver this prospectus to all the shareholders. It covers all the information regarding the investment objective of the fund, the fees that will be incurred, past performances, risks, commissions, and shareholder information.
  2. Summary Prospectus: This is a shorter document that tries to simplify information for the investor in a few pages. However, some experts believe that the summary prospectus is more of a marketing material.

How to read a mutual fund prospectus?

When reading a mutual fund prospectus, you can start by focusing on these sections:

Step 1: Focus on sections detailing investment goals, strategies, and risk factors

This part of the mutual fund prospectus will give a breakdown of what the fund aims to achieve and the investment method that will be employed to reach this goal.

It will explain the strategies that will be used, different types of asset allocation, and the basis on which they will be selected. This section will also disclose the risks that will be involved and how they match with the investor’s risk tolerance.

Step 2: Review the fees and expenses to understand the cost of investment along with past performance

This section can be considered as a cost-benefit analysis for the fund. ​​ It will list out management fees, administrative fees, and the fund’s expense ratio while also describing the historical performance of the fund.

Look at the fund's performance over multiple years to understand its consistency and resilience in different market conditions.

Assess the fund’s returns against its benchmark to gauge its relative performance. Consistent underperformance relative to the benchmark may indicate poor management.

Here are the different expenses related to the fund that will be stated in the prospectus.

Fee type Description
Management fees Fees paid to fund managers to manage the portfolio
Administrative fees These fees cover administrative costs such as record-keeping, legal fees, and accounting
Expense ratio The total annual operating expenses of the fund are expressed as a percentage of average net assets
Entry load Fee charged when purchasing units (if applicable)
Exit load Fee charged when selling units before a specified period


Step 3: Management, shareholder information, and statement of additional information

This section will highlight the management company that advises the fund and the individual portfolio managers that will be responsible for making all investment decisions.

It will also carry information on buying and selling shares, tax implications, and the rights you have as a shareholder. It will also mention where investors can find more detailed information, resumes of fund managers, and work timings and often point to a more comprehensive Statement of Additional Information (SAI) document.

What does a mutual fund prospectus mean for individual investors?

The mutual fund prospectus helps investors make informed decisions. It helps them understand nuances and align financial goals with the fund's risk-return. Access to this detailed information helps investors set realistic expectations and contributes to more strategic, well-informed portfolio management.

Understanding risks and performance in mutual fund prospectus

Investing in mutual funds involves various risks, which the prospectus will detail. These can include market, credit, liquidity, and specific risks related to certain assets or strategies.

Understanding these risks alongside historical performance data from a mutual fund prospectus is vital for assessing potential returns and determining if a fund aligns with one’s investment horizon and risk profile.

Conclusion

A mutual fund prospectus relays a lot of important details that investors need to be mindful of. Information about fund objectives, investment strategies, and risks involved proves to be extremely helpful when you are deciding on an investment. Sections related to fees and expenses also set a realistic picture of how much money you will be charged throughout your investment.

Although past performances do not always guarantee earnings in the future, a fund’s performance during challenging times can be indicative of how your investment will grow with time.

For those looking to invest in mutual funds, the Bajaj Finserv Mutual Fund Platform can be incredibly helpful. It lets you browse through over 1,000 mutual fund schemes and also compare mutual funds to find the one that aligns with your investment goals and risk tolerance.

Through the Bajaj Finserv Platform, you can either make lumpsum investment or start SIP investment and gradually build your portfolio.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

Where do you find a mutual fund prospectus?
A mutual fund prospectus can typically be obtained directly from the mutual fund company's website or through your financial advisor.
What should I pay attention to in a mutual fund prospectus?
In a mutual fund prospectus, pay close attention to the investment objectives, strategies, associated risks, fee structure, and historical performance data.
Why Is a Prospectus Useful for Investors?
A prospectus is useful for investors as it provides essential information about a fund’s objectives, risks, fees, and management, helping them make informed investment decisions.
What Information Is Normally in a Prospectus?
A prospectus typically includes detailed information about the investment's objectives and strategies, risk factors, past performance data, fund management details, fee structure, and information on how to buy and sell shares.
What's the Difference Between a Preliminary and a Final Prospectus?
A preliminary prospectus outlines initial details and terms about an offering, while a final prospectus contains complete and legally binding information after all details have been confirmed and approved by regulatory bodies.
Is the prospectus and IPO the same?
No, a prospectus is a document that provides details about an investment offering to the public, while an IPO (Initial Public Offering) refers to the process of a company selling its shares to the public for the first time.
How long is a mutual fund prospectus good for?

A mutual fund prospectus is typically updated annually, though amendments may be made more frequently if significant changes occur within the fund.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.