All funds must send their shareholders audited annual and semiannual reports. Mutual funds are allowed to combine their prospectus and annual report; some do this, but many do not.
The annual report describes the fund activities over the past year and provides a listing of all investments of the fund at market value as of the end of the fiscal year. Sometimes the cost basis of each investment is also given. Looking in-depth at the individual securities held by the fund is probably not the best use of time. However, it is helpful to be aware of the overall investment categories. For instance, investors should look at the percentage invested in common stocks, bonds, convertible bonds, and any other holdings. In addition, a look at the types of common stocks held and the percentage of fund assets by industry classification gives the investor some indication of how the portfolio will fare in various market environments.
The annual report will also have a balance sheet, listing all assets and liabilities of the fund by general category. This holds little interest for investors.
The statement of operations, similar to an income statement, is of interest only in that the fund expenses are broken down. For most funds, the management fee is by far the largest expense; the expense ratio in the prospectus conveys much more useful information. The statement of changes in net assets is very close to the financial information provided in the prospectus, but the information is not on a per share basis. Per share information will, however, frequently be detailed in the annual report in a separate section. Footnotes to the financial statements elaborate on the entries, but other than any pending litigation against the fund, they are most often routine.
The quarterly or semiannual reports are current accounts of the investment portfolio and provide more timely views of the fund's investments than does the annual report.
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