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Mutual Funds
The Prospectus |
So you've identified a few suitable funds, now
what? The next step is one of the most daunting tasks for investors -- reading the fund's
prospectus.
Remember, a fund company must provide you with a prospectus before they can take your
money. The SEC requires it. You may find the prospectus a dull read, but buried beneath
those big words and fine print is some very useful information.
A prospectus discloses basic information about the fund -- objectives, risks, past
performance, sales and management fees, etc.
Along with the prospectus, you'll also receive an annual or quarterly report that
addresses the fund's past performance as well as some of its financial holdings.
If you want a more detailed report of the fund -- such as officer compensation or other
financial statements -- you'll have to ask for the fund's Statement of Additional
Information (SAI). They're required to supply it free of charge.
A few key areas of the prospectus:
1. The Fund's Investment Objectives
Here you'll find what the fund seeks to accomplish and how much risk it's going to take --
look for statements like "long-term growth of capital" or "capital
appreciation". This section should also discuss the fund's investment strategies.
That is, how the fund plans to invest your money. The fund manager may be applying a
"bottom-up" or "earnings growth" approach to picking investments.
Bottom Line: Check the fund's holdings (annual report) and verify they
match the fund's stated objectives as well as your personal needs.
2. Performance
Usually illustrated with bar charts. Depicts how the fund's performance has varied over
time and compares the fund's average annual returns to a market index -- such as the
S&P 500. Returns are normally broken into 1, 5, and 10 year intervals.
3. Fees and Expenses
Includes a standardized table that describes the fees and expenses you'll be charged. They
include shareholder fees such as sales charges, redemption or exchange fees. Or operating
expenses -- accounting, portfolio management or other services.
You'll be shown a hypothetical example of how a $1,000 investment with a 5% growth rate
will cost for 1, 3, 5, and 10 years.
4. Other Features
Here you'll find other miscellaneous information:
- How to get in touch with the fund company.
- Minimum investments.
- Types of account ownership.
- How to open an account.
- How to purchase, redeem, or exchange shares.
- Shareholder services and account policies.
- Distribution and taxes.
- Glossary of investment terms.
Next: Fees and Expenses
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