If there were a competition for the most overblown and underused document in the investing world today, the mutual fund prospectus would take first prize.
Now don't get me wrong -- there is a wealth of crucial information in a fund's prospectus, but it's not easy to find among all the legal jargon and superfluous disclosures. More often than not, the dozens and dozens of pages that make up a fund prospectus end up intimidating investors who simply choose not to read the document before investing.
But a new proposal may soon change all that.
Short and sweet
Plans are in the works for a summary prospectus of only a few pages to take the place of the traditional, long-winded document. Investors would still be able to request the longer prospectus via the fund company's website, if they desired. It is thought that by distilling the prospectus to its most important points, investors would be more likely to read, and understand, the summary.
Information about the fund's goals, the type of securities it will buy, fees, investment risks, tax information, and performance track record would be included. If the Securities and Exchange Commission agrees to the summary prospectus, investors will begin receiving them sometime next year.
This is a much-needed development for the mutual fund world. Investors have routinely ignored fund prospectuses for far too long and with good reason. By trying to cover all of their bases to avoid potential litigation in the event of investment losses, fund companies have created a monster of a disclosure document. Investors of all stripes will likely be much more willing to take the time to digest a concentrated version of a fund prospectus.
Some have objected that less-sophisticated investors might confuse the SEC-mandated summary prospectus with the fund company's marketing and sales material, and treat the two as interchangeable. But this is a relatively minor concern in the scheme of things.
Fund companies such as Janus Capital
At any rate, I'll be waiting eagerly for the new summary prospectuses to show up in my mailbox in the not-too-distant future.
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Amanda Kish, CPA, heads up the Champion Funds newsletter service, and does not own shares of any companies or funds mentioned. Legg Mason is an Inside Value recommendation. Click here for the Fool's disclosure policy.