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What is meant by the term simplified prospects?

First off, a simplified prospectus isn't what it sounds like. It is a generic term for the new standard format of an investor-friendly prospectus - a short, readable and informative document outlining the important facts about the company and its securities.

While the document is not simple, the new format is easy to read and more straightforward than the older versions. Simplified refers to the fact that the prospectus doesn't contain detailed financial statements.

Ignore the prospectus at your own peril

If the mere thought of reading a prospectus sends you into a deep sleep, you are not alone. Many investors overlook the prospectus, or glance through the document, after they have purchased an investment.

The time to read a prospectus is before you purchase, not after. The document is a gold mine of information that can save you money and give you important details about your investment.

Three money-saving details in a prospectus:

What's the track record of the investment?

Listed under financial highlights or past performance, you will find detailed financial information going back ten years, or as long as the investment has been in existence. Comparative returns such as annual compound returns are given, as well as a comparative benchmark in most cases.

Look at the investments net asset value (NAV) under financial highlights. This is effectively the price of a fund share, for example, at the beginning of a given year.

What fees are involved in this investment?

Again, in the financial highlights section, usually listed under fees and expenses, or ratios and supplemental data, is the all-important management expense ratio. This expense, commonly referred to as MER, is part and parcel of a mutual fund purchase. This measures the percentage of the fund's assets that go to paying managers' salaries and the operating expenses of the fund. You won't find these expenses listed on your monthly investment statement.

Fees vary greatly depending on the type of mutual fund and they can range from a small percentage point up to 3 per cent. For instance, the average Canadian equity fund charges about 2 per cent in MERs, while index-based funds that are not actively managed, charge as low as .5 per cent.

Be aware of sometimes costly redemption fees as well, usually listed under purchases, switches and redemptions.

What's the investment strategy?

Again, you want to know this information before you purchase an investment. Is the fund, for example, growth or value, a small-capitalization or a large-capitalization fund? The prospectus usually won't detail the fund holdings but it will describe the fund's objective and the game plan for achieving it.

Other details included that investors may find surprising are the risks of investing in the fund and a description of who should invest in the fund. A conservative investor may be cautioned against investing in an aggressive emerging markets fund for instance. Or they may be advised to add just a small amount in a portfolio for diversification.

Tax Bite

A point that investors often overlook is the portfolio turnover rate. This is the amount of total assets that, in percentage terms, changed over the year. In other words, it's an indication of trading activity in the portfolio that can generate capital gains taxes outside of a registered retirement savings plan. A figure of 75% indicates that essentially three-quarters of the portfolio was turned over, but a figure of around 25% would indicate a low turnover.

The turnover can affect the bottom line. An investor only pays taxes on the fund's income and capital gains distributions (which usually occur in December). A fund with a low turnover usually means lower taxes since long-term holdings will benefit from the lower capital gains tax rate.

What the prospectus won't tell you

While the new prospectuses are much improved, there will be little information on the portfolio track record of the manager. Managers change companies and sometimes their strategy changes. Both circumstances can greatly affect your portfolio and performance returns. If, for example, you purchased a fund five years ago, it may now hold a totally different basket of companies. Do you know what you own?

The last word

A simplified prospectus is just one more tool in the wise investor's tool kit. It is not a complete picture so it's important to augment your research with information from other sources such as newspapers, the Web, magazines and books.