SIE Ready🧺 Packaged Products · Lesson 4 of 7 · 5 min
Fund Flavors, Fees and the Prospectus
📚 Growth, income, balanced, sector, index, money market: the fund's name tells you its goal, and the expense ratio tells you what it costs every single year.
💡 Key idea
Objective first, then cost: the expense ratio is charged every year, while a sales load is charged on the purchase or sale.
🧠 Why it matters
A fund's OBJECTIVE drives its holdings. GROWTH funds seek capital appreciation; INCOME funds seek dividends or interest; BALANCED funds hold both stocks and bonds; SECTOR funds concentrate in one industry (more risk); INDEX funds track a benchmark passively, usually with low costs; MONEY MARKET funds hold short-term, high-quality debt; they are not FDIC-insured and can lose value. The EXPENSE RATIO is yearly operating costs (management fee, 12b-1, other expenses) as a percent of average net assets. Example: $20,000 in a fund with a 0.40% expense ratio costs about $80 a year. The PROSPECTUS (or summary prospectus) describes objectives, risks and fees; the STATEMENT OF ADDITIONAL INFORMATION (SAI) gives more detail and is free on request.
📈 In the real world
🧾 Dev compares two index funds tracking the same benchmark. One has a 0.05% expense ratio, the other 0.65%. On $50,000 that is $25 versus $325 a year for nearly identical holdings. His rep points him to the fee table in each prospectus, and to the SAI for more detail.
📌 Takeaways
- Sector funds concentrate risk; balanced funds mix stocks and bonds
- Money market funds are not FDIC-insured and can lose money
- Expense ratio = yearly costs ÷ average net assets; SAI is free on request
📖 Terms in this lesson
Expense ratio: A fund's annual operating expenses as a percentage of its average net assets.
Statement of additional information (SAI): A fuller fund disclosure document, beyond the prospectus, available free on request.
Money market fund: A fund holding short-term, high-quality debt that aims for stability but is not FDIC insured or guaranteed.
✅ Test yourself
Which fund type holds both stocks and bonds to provide income and growth?
- Growth fund
- Sector fund
- Money market fund
- Balanced fund
Answer: D · Balanced fund
A balanced fund deliberately mixes stocks and bonds. A sector fund concentrates in one industry, a money market fund holds short-term debt, and a growth fund focuses on appreciation, usually through stocks.
An investor holds $30,000 in a fund with a 0.50% expense ratio. Roughly how much does it cost per year?
- $15
- $150
- $1,500
- $300
Answer: B · $150
$30,000 × 0.0050 = $150 per year. $1,500 treats 0.50% as 5%, $15 treats it as 0.05%, and $300 doubles the rate.
Which document provides more detail than the prospectus and must be sent free on request?
- The fund's annual proxy statement
- The customer's account statement
- The fund's new account form
- The statement of additional information
Answer: D · The statement of additional information
The SAI expands on the prospectus (history, policies, management details) and is available free on request. Proxy statements relate to shareholder votes, and account statements and forms are customer records, not fund disclosure documents.
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