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Investor BulletIn

How to read A Mutual Fund shareholder report

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate individual investors about 

mutual fund shareholder reports.

Annual and Semiannual Reports

Mutual funds that are registered with the seC must send reports to their shareholders on a semiannual basis. the 

semiannual report covers the first six months of the fund’s fiscal year, while the annual report covers the fund’s entire fiscal 

year. Mutual funds that are registered with the seC prepare their own shareholder reports and file them with the seC. 

so long as these funds disclose the information that the seC requires in the shareholder report, they can decide how to 

organize and present the information within the report.

this investor bulletin focuses primarily on the annual report; however, many of the considerations also apply to the 

semiannual report. think of these shareholder reports as a “report card” on the fund’s progress. Reading these reports can 

help you determine how well a fund has met its goals and investment strategies during the period covered in the report.

What Information Can I Find in a Shareholder Report?

the table below identifies select information required to be disclosed in: (1) both the annual and semiannual report; 

and (2) the annual report only.

Annual and Semiannual Report

expense example showing the cost in dollars for a hypothetical $1,000 investment over the period covered by the report.

Graphical representation of holdings—table, chart, or graph of holdings by category (e.g., type of security, industry sector, 

geographic region, credit quality, or maturity).

Financial statements:

§	 Annual report—audited financial statements, including a complete or summary (top 50) list of holdings.

§	 semiannual report—financial statements need not be audited.

Condensed financial information (or financial highlights).

remuneration or compensation paid to directors, officers, and others.

statement regarding basis for approval of investment advisory contract—discussion of the reasons the board approved any 

investment advisory contract during the period covered by the report.

Table continued on next page
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Continued from previous page

Annual Report Only

Performance information:

§	 Management’s discussion of fund performance;

§	 line graph comparing the performance during the last 10 years (or for the life of the fund, 

if shorter) of a hypothetical $10,000 initial investment against an index; and

§	 table showing the fund’s returns for 1-, 5-, and 10-year (or for the life of the fund, if shorter) periods.

Note: Although performance information is required for the annual report only, many funds include performance information 

in their semiannual report as well.

Management information about directors and officers, including their names, ages, length of time at fund, principal occupations 

over the past 5 years, and responsibilities.

Availability of additional information about fund directors:

§	 statement explaining that more information about fund directors is available in the statement of Additional 

Information or online or by calling a toll-free telephone number.

Investors generally read the shareholder report to determine how well a fund has met its goals and investment 

strategies during the past six-month period (semiannual report) or the past fiscal year (annual report). Following are 

descriptions of several items in a shareholder report. the order of the items listed may vary from one report to another.

Performance Information

As shown in the table above, the performance information typically consists of three components: (1) management’s 

discussion of fund performance; (2) a line graph comparing the performance during the last 10 years (or for the life of the 

fund, if shorter) of a hypothetical $10,000 initial investment against an index; and (3) a table showing the fund’s 

returns for 1-, 5-, and 10-year (or for the life of the fund, if shorter) periods.

Management’s Discussion of Fund Performance. You will find fund management’s discussion near the 

front of the annual report. this is management’s opportunity to discuss the fund’s performance during the 

fiscal year in light of market conditions and other factors that may have influenced the fund’s investment return 

for the year. In that discussion, management usually will point out which holdings of the fund contributed 

significantly to the fund’s performance and which holdings detracted significantly from that performance.

Line graph. Also near the front of the annual report is a line graph comparing the performance during the 

last 10 years (or for the life of the fund, if shorter) of a hypothetical $10,000 initial investment in the fund 

against an index. the line graph will be some variation of the generic line graph pictured below:
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the graph will show the progress of at least two lines over a ten-year period. one line will represent the 

growth or decline in value of a hypothetical $10,000 initial investment in the fund during the last 10 

years (or for the life of the fund, if shorter). Another line will represent the performance of an appropriate 

broad-based securities market index (for example, the s&P 500 index) during the last 10 years (showing the 

growth or decline in value of the hypothetical $10,000 had it been invested in a fund corresponding to that 

index). there may be additional lines representing other indexes, including those more narrowly-based that 

reflect the market sectors in which the fund invests or a non-securities index such as the Consumer Price 

Index, so long as the comparison is not misleading.

A quick glance at the graph will tell you whether the fund’s performance has been steady or volatile over 

the 10-year period (or over the life of the fund, if shorter). For example, if the slope of the line is gradual, 

with occasional ups and downs, it suggests that fund performance has been relatively stable. If, on the other 

hand, the slope of the line is choppy, with numerous peaks and valleys, it suggests that the fund has been 

volatile and has experienced frequent variations in performance. Compare the slope of that line with the line 

representing the index to which the fund is being compared. How closely does the fund’s performance track 

that of the index?
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n Performance Table. underneath the line graph is a table showing the fund’s annualized (or average annual) 

returns for 1-, 5-, and 10-year (or for the life of the fund, if shorter) periods. Below is an example of this type 

of table:

Average Annual Total Returns

Periods Ended December 31, 20XX

one Year Five Years ten Years Final value of a $10,000 investment

XYZ Fund 1.08% 0.31% 3.84% $14,575

Benchmark/Index 1.08 0.29 3.87 14,616

Pay close attention to the fund’s 5- and 10-year returns. If the fund’s returns were stellar in the past year but 

unimpressive in the past five or 10 years (or over the life of the fund, if shorter), it is possible that the past year’s

outperformance will not last. on the other hand, if the fund experienced steady returns in the past five or 10 

years, but suffered a sharp loss in the past year, it may be unclear as to whether the recent loss signals the 

beginning of a trend or is an isolated occurrence. Just because a fund had one good year does not mean that 

positive investment returns will continue. Remember, past performance is not necessarily an indication of 

future results.

Expense Example

the expense example is calculated using a fund’s expense ratio for the preceding six months but does not include the 

impact of sales loads, if any. the expense example consists of two different tables. the first table shows the actual cost 

in dollars for a hypothetical $1,000 investment in the fund over a six-month period. Below is an example of this 

type of table:

Six Months Ended January 31, 2013

XYZ Fund

Based on Actual Beginning Account value ending Account value expenses Paid

Fund Return 7/31/2012 1/31/2013 During Period

ABC shares $1,000 $1,031.75 $1.23

DeF shares 1,000 1,032.25 0.51

Institutional shares 1,000 1,032.55 0.41

According to the example above, if you owned class ABC shares in the hypothetical XYZ Fund, you would have paid 

$1.23 in expenses for every $1,000 that you owned in the fund during the six-month period identified at the top of the

table. to find out how much your expense was during that six-month period, round the value of the shares you own to 

the nearest multiple of $1,000 and multiply by the expense amount.

For example, if you had approximately $25,000 invested in the ABC share class of the hypothetical XYZ Fund, your

expenses would have been: 25 x $1.23 = $30.75 over the six-month period.
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the second table in the expense example shows the cost in dollars for a hypothetical $1,000 investment in the fund over 

the six-month period based on a hypothetical 5% yearly return and not the actual return of the fund during that 

period. Below is an example of this type of table:

Six Months Ended January 31, 2013

XYZ Fund

Based on Hypothetical Beginning Account value ending Account value expenses Paid

5% Yearly Return 7/31/2012 1/31/2013 During Period

ABC shares $1,000 $1,024.00 $1.22

DeF shares 1,000 1,024.70 0.51

Institutional shares 1,000 1,024.80 0.41

Because funds are required to use the same hypothetical performance in calculating their expenses for the period 

covered by the shareholder report, this second table makes it possible for you to compare the expenses of this fund with 

that of other funds. For example, the table above shows that the expenses paid during the six-month period for class 

ABC shares—assuming a 5% annual return—would have been $1.22 per $1,000 invested. You can compare that 

expense with that of a completely different fund to determine which fund has higher operating expenses. If, for example, 

that other fund showed an expense ratio of $1.55 per $1,000 invested in a similar share class, that other fund generally 

would be considered more expensive than the XYZ Fund (as stated above, these examples do not include sales loads).

Financial Statements

the annual report contains audited financial statements, including a complete or summary (top 50) list of portfolio 

holdings. this is where you can learn, among other things, what assets the fund holds (or at least the 50 largest individual 

holdings), the number of shares owned of each asset, and their market value. regardless of whether the financial 

statements include the complete list or a summary of portfolio holdings, you can find the full list in the fund’s seC 

filings, which are publicly available through the seC’s eDGAr database (www.sec.gov/edgar/searchedgar/mutualsearch.htm). Also, if the fund posts its complete list of portfolio holdings online, you may be able to locate that list 

on the fund’s website identified in its annual report.

As you review the portfolio holdings, consider the following questions:

n Are the fund’s holdings, as reflected in the financial statements, consistent with the fund’s investment objectives 

and strategy as stated in the fund’s prospectus?

Are the fund’s holdings consistent with your expectations, based on the fund’s name, investment objectives, 

strategy, and principal risks as disclosed in the fund’s prospectus?

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n Do you detect any “style drift,” meaning the fund has strayed from its stated investment objectives (for example, 

an international stock fund that is unusually concentrated in domestic stocks, or a specific country fund that holds 

a lot of assets in a country other than the one identified in the name of the fund)?

Do the fund’s holdings overlap or mirror those of other funds that you own? If so, your investments may not be 

sufficiently diversified. unless you intend to concentrate your investments in a few stocks or bonds or industry 

sectors, consider adjusting your asset allocation to achieve a more diversified portfolio.

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Graphical Representation of Holdings

the shareholder report contains a table, chart, or graph of the fund’s holdings by category (for example, type of security, 

industry sector, geographic region, credit quality, or maturity). Below is a hypothetical example of what a table showing 

a fund’s holdings categorized by industry sector might look like:

Portfolio Allocation as of ___, 20XX

Percentage of Net Assets

Consumer Discretionary 12.0%

Consumer Staples 9.9

Energy 10.0

Financials 15.4

Health Care 12.0

Industrials 11.0

Information Technology 19.2

Materials 3.9

Telecommunication Services 2.9

Utilities 3.7

Condensed Financial Information/Financial Highlights

the condensed financial information or financial highlights section includes a summary table of financial information 

covering the past five years (or since the fund’s inception, if less than five years). the summary table contains a breakdown 

of the change in the fund’s net asset value (nAv) from one year to another over the five-year period.

n look at the line item showing the fund’s total return over the past five years. What does the total return tell 

you about the fund’s performance trend during the last five years? Have the fund’s returns been relatively steady 

from year to year or have they been volatile?

look at the line item showing the fund’s portfolio turnover rate. the portfolio turnover rate reveals the frequency 

with which the fund turns over its portfolio by buying and selling securities. the fund pays transaction costs, 

such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover 

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rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable 

account. these costs, which are not reflected in annual fund operating expenses or in the expense example, 

affect the fund’s performance. the portfolio turnover rate will vary depending on the fund’s investment 

strategy. An actively-managed fund may have a high portfolio turnover rate because of its rapid trading style, 

while a broad-based index fund will tend to have a low portfolio turnover rate due to its passive investment 

style. Keep in mind that a higher turnover rate may generate higher commissions and other trading costs that 

can cut into a fund’s performance; it may also trigger capital gains taxes which the fund will pass on to you.

the issue of return of capital distributions comes up occasionally with respect to open end funds, and the

financial highlights section of the shareholder report provides information about the fund’s distributions to 

shareholders. Distributions to shareholders may come from net investment income, net realized gains, or return 

of capital. If a fund does not earn enough income and realized gains to cover its distributions to shareholders in a 

given year, the fund may return capital to its shareholders. Investors should not mistake any return of capital for 

yield or total return on their investment in the fund. shareholders who periodically receive a dividend payment 

or other distribution consisting of a return of capital may think that they are receiving net profits when, in fact, 

that is not the case. under this circumstance, you should not assume that the source of a distribution from the 

fund is net profit.

skim the Notes to Financial Statements. these notes can contain useful information about the fund, such 

as whether there are any pending lawsuits or other contingencies that could affect the fund’s performance or 

the operation of the fund.

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Additional Items

the annual report contains additional items, some of which are summarized here. For example, you can find 

management compensation information in a number of places in the annual report. Funds typically disclose management 

compensation information in the Notes to Financial Statements, usually in two different locations within the annual 

report. Management compensation paid to the adviser usually is disclosed in a note that discusses the advisory fee rate 

and/or fees paid to affiliates. the amount paid to directors is generally reported in a separate note in the Notes to 

Financial Statements. the annual report also contains information about the fund’s directors and officers, including 

their names, ages, length of time at the fund, their principal occupations over the past five years, and their responsibilities. 

In addition, either the annual or semiannual report will contain a statement regarding the basis for board approval of 

the investment advisory contract (discussing the reasons the board approved any investment advisory contract during 

the period covered by the report), as well as proxy-related information.

on rare occasions, annual and semiannual reports will contain information regarding changes in and disagreements 

with accountants (if applicable). Annual and semiannual reports also include statements regarding the availability of 

the quarterly portfolio schedule, proxy voting policies and procedures, and the fund’s proxy voting record.
Related Information

For an explanation of how mutual funds work and a description of fees, expenses, and share classes, see our 

publication: Mutual Funds - A Guide for Investors (available at http://www.investor.gov/mutual-funds).

For additional information about the importance of mutual fund fees and other considerations, see our publication: Mutual Fund Investing: look at More than a Fund’s Past Performance (available at http://www.sec.gov/

investor/pubs/mfperform.htm).

The Office of Investor Education and Advocacy has provided this information as a service to investors. 

It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the 

meaning or application of a particular law or rule, please consult with an attorney who specializes in 

securities law.

SEC Pub. No. 138 (4/13)