New fund profile may be more useful for investors

July 19, 1995|By ANDREW LECKEY

Blind faith. That's what most mutual fund investors base their selections upon.

They read an article or see an advertisement, then take a cursory look at the specifics of a fund in question. But they often forge ahead without studying the fund's financial information before they put down their hard-earned money.

They usually don't glance at the fund prospectus, a lengthy, hard-to-understand legal document that explains investment strategy and risk.

On Aug. 1, however, this process will change with the arrival of a simplified fund prospectus. Called a fund profile, it's a two-page summary of the full prospectus document.

It's based on the principle that less can be more.

Eight designated mutual fund companies that have been working with regulators will each begin providing this profile to investors for three of their funds -- a stock fund, a bond fund and a money market fund. It will initially be used as a prospectus wrapper or separate document to accompany the full prospectus.

Fund companies and federal and state regulators will survey recipients during the coming year to determine whether this document has enough information to lead investors to a wise decision. If the test goes well, this becomes the new streamlined way of selling funds.

The profile prospectus will include this pertinent information:

* Goals or objectives of the fund, including what type of fund it is.

* Investment strategies, including description of the sorts of securities in which it will invest.

* Risk factors associated with the fund and explanation of how diversified it is.

* Characteristics of an investor for whom the fund might be appropriate or inappropriate.

* Fees and expenses, including a fee table with hypothetical example.

* Past performance as explained by a bar graph showing annual total returns for the last 10 calendar years (or the life of the fund if less than 10 years). Money market funds will include seven-day yield and a toll-free number that investors can call to obtain the yield, while other funds include standardized 1-, 5- and 10-year total return data.

Additional required information includes the identification of the fund investment adviser, explanation of how to purchase and redeem shares, timing of distributions, and services such as exchange privileges and telephone transactions.

Some critics say this procedure means investors will make even less use of pertinent information included in a full prospectus. But others believe the current prospectus has evolved into a document designed to avoid lawsuits rather than impart relevant investment knowledge.

"I guess I'm more of a realist, in that I know that nobody really reads the prospectus now anyway," said Stephen Savage, editor of the ValueLine Mutual Fund Survey in New York. "It's better to VTC have a document that stands a decent chance of being read and understood, rather than an imposing legal document no one looks at."

The fund industry would like to see the profile prospectus become the primary document in mutual fund sales, with additional information available for those who want it.

"Volumes of materials such as newspaper and magazine articles and investment services are available publicly today regarding mutual funds, making the prospectus only one of many sources investors use to make a decision," said Henry Hopkins, managing director for mutual fund company T. Rowe Price Associates in Baltimore.

Participating in the profile prospectus test are Bank of America, Capital Research & Management, Dreyfus, Fidelity, IDS, T. Rowe Price, Scudder and Vanguard.

However all of this turns out, investors should always make use of what information they do receive.

"People have to understand what the instrument is and what they're actually investing in, then understand its objectives in relation to their needs and risk tolerance," counseled Neal Sullivan, executive director of the North American Securities Administrators Association in Washington.

Americans do a great job of research when buying a new car or air conditioner, Mr. Sullivan noted, and there should be the same public awareness in purchasing investments.

Investors often make mistakes when they send in the wrong amount of money because they didn't read what the minimum investment requirement was, noted Mr. Hopkins. They incorrectly fill out the application. But the major mistakes involve not understanding what a fund is all about, he believes.

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