While the $1.7-trillion mutual fund industry has hit the big time in the 1990s, its basic compact with investors has proved difficult to modernize.
That compact is the prospectus, a document published by each fund that _ for all recent attempts at streamlining _ can still easily run to 50 or 60 pages of dense boilerplate.
"You've heard it a dozen times: "Read the prospectus before you invest,'
" says the Investment Company Institute, the funds' largest trade association, in a pamphlet it offers as a guide to prospectus-deciphering.
"It's not as if you haven't tried. But it's almost like reading the fine print on a legal document. You're not sure what some of it means or why it's there."
The industry and its regulators have been trying, too, seeking to develop a reader-friendly format that still serves all the legal requirements imposed on the prospectus.
Since 1983 the Securities and Exchange Commission has permitted some of the material that funds are required to disclose to be published in a separate "statement of additional information" distributed to investors only at their request.
By law the prospectus itself must be supplied to investors before they buy shares or along with the confirmation of their initial purchase.
Marketing executives and staffers at the fund organizations, meanwhile, vie to write prospectuses that might reach a welcoming eye. Fund sponsors such as Gateway, Liberty and Putnam now publish prospectuses as centerfolds in broader explanatory sales literature.
But few people inside or outside the business are ready to proclaim the campaign a success. Over the past 10 years "the simplified prospectus has grown lengthier, more complex and less comprehensible to investors," says Matthew Fink, the ICI's president.
In current fund prospectuses, investors still routinely encounter sentences like: "The Fund intends to qualify and elect to be treated each taxable year as a "regulated investment company' under subchapter M of the Internal Revenue Code of 1986, as amended."
A proposal awaiting SEC approval would let funds offer their shares for sale through so-called summary prospectuses _ short-form descriptions and account applications that fit readily into newspaper and direct-mail ads.
These would not be "short, sexy ads with purchase coupons," Fink declares, but "would be a summary prospectus, containing key information specified in SEC rules." A full prospectus would be forwarded to investors later.
Proponents of this idea, sometimes called off-the-page advertising, say it might encourage increased disclosure to investors such as participants in employer-sponsored 401(k) plans, many of whom are presumed not to be reading a word of the prospectus as things now stand.
While this whole struggle continues, today's fund investors aren't excused from paying attention.
The onus is on them to understand the conditions spelled out in the prospectus, including what the fund's investment advisers are authorized to do with the money entrusted to them.
The fees that can be charged, the risks that can be taken, the procedures to be followed in cashing out of a fund as well as buying in _ all such matters are spelled out in the prospectus.
Thus, prospectuses merit attention not only when you first consider a fund, but also as a necessary current reference all through the time when you own any of its shares.
"One of the most important things you should remember as you select a mutual fund is to always understand what you're investing in," says IBC-Donoghue of Ashland, Mass., in its annual Mutual Funds Almanac.
"The best way to gain such an understanding is to read the mutual fund's prospectus. The prospectus is your road map to the fund."