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In the same way food packages carry standard nutrition information, and credit card statements must now clearly show the total cost of interest charges over time, mutual funds will soon be required to provide basic information, in plain English, to help the average investor evaluate and select mutual funds.

Mutual funds are popular because it’s a cost-effective way for an individual to have a diverse portfolio (of stocks, bonds, money market instruments and other securities) that is managed by a financial professional. The only real decision the individual investor has to make is which mutual fund or funds to invest in. Many mutual funds actually underperform the market, so this is a particularly important decision! The new SEC rules are designed to help.

The SEC’s new rule requires mutual funds to “provide risk/return summary information in a form that is intended to improve its usefulness to investors.” The summary includes a description of the fund’s objective, strategy, risk, fees and administrative costs, part performance and annual total returns. You get

• basic information for evaluating the fund
• all in one place
• written in plain language AND written in a format that computers can read
• filed with the SEC and posted available on the mutual funds’ website.

It’s not that mutual funds didn’t previously report this information. But finding it all, or using it in any type of software application, would take serious dedication. If you wanted to track performance, monitor changes, or compare various mutual funds, you would have to regularly devote many hours of reading, copying, and pasting updated information.

The summarized risk/return information, because it will be formatted as XBRL data, will be downloadable directly into spreadsheets, for automated analysis using off-the-shelf software such as Excel or the SEC Mutual Fund Viewer, or with more user-friendly applications such as EDGAR Pro or I-Metrix.  As the SEC says, “any investor with a computer and an Internet connection will have the ability to acquire and download interactive data that have generally been available only to intermediaries and third-party analysts.”

You will be able to compare mutual funds on whatever basis you select as most important to you, whether that be fees versus returns, or the make up of the portfolio, or investment strategies and more.

The new SEC requirement doesn’t kick in until January 2011, but a lot of leading mutual funds are already complying, using the SEC’s voluntary filing program. You can go to the SEC website for a preview of what’s to come.

Attention mutual fund managers

If you want to join the voluntary program and get a jump start on the SEC rules, contact EDGAR Online to learn more about the EZ Start XBRL Filing Solution for Mutual Fund clients.