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Plan Well, Retire Well

Saving and investing your money

Mutual fund investing may get a little easier with shorter prospectuses


You know the drill--before investing in anything you're supposed to swear that you've received and read the prospectus. That's the small book in fine print that you get about any mutual fund that you invest in.

I'd like a show of hands: How many of you read the prospectus for the mutual fund you picked in your 401(k)? How about your IRA?

You're probably like the other 98% of investors--you take one baffled look at the thing, and it either goes in the recycling bin or into a drawer, never to be seen again.

There actually is important information in those prospectuses, and it may be getting easier to find that important information. You can help make sure it happens.

The SEC (that's the Securities and Exchange Commission) has proposed a streamlined, 3-page summary prospectus that cuts to the chase. You can see a sample on the SEC's website. And you can provide comments about it until Feb. 28. Your feedback could encourage the SEC to make this idea a reality.

In my opinion, the most important pieces of information in the prospectus are:

  • What types of investments can the fund hold? Is it stocks of large (or small, or middle sized) US companies only? Or US bonds?Or foreign stocks? Or something else? Or a mixture? Most importantly, is that what you need to add to your investment mix?

You'll find this in the Summary Prospectus under Principal Investment Strategies.

  • How does the fund invest: does the manager actively choose the investments, or does the fund try to mirror an index--an unmanaged basket of investments, like the Standard and Poor's 500 or the EAFE international index? Index funds offer several advantages (more about that another day...).

This information would also probably appear in the summary prospectus under Principal Investment Strategies.

  • What are the costs of investing in this fund? What is the annual expense ratio–the amount per $100 it costs you to own the fund each year? And is there a load–a sales charge–to either purchase or sell the investment? Research shows lower-cost investments tend to do better than high-cost ones.

You'll find the loads in the Summary Prospectus in the table labeled Shareholder Fees, and the expense ratio in the table labeled Annual Fund Operating Expenses.

You won't be getting these little 3-page prospectuses from your mutual funds right away, but here's why it's useful to look at it now: once you can recognize the important information in the streamlined prospectus, you can probably quickly scan and find it in that 28-page version you have in the drawer! Give it a try. I dare you!

For more help understanding investments, register for our free, interactive web site at www.RetireWell.uiuc.edu and go to Choose Investments.

Comments? E-mail me at RetireWell@uiuc.edu.



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