Mutual Funds

Mutual Fund Prospectus

The prospectus is a legal document that includes information about the mutual fund. In this document you will find information about the terms of the offer, the issuer, and its objectives. In the aftermath of the 1929 stock market crash the federal government in the Securities Act of 1933 required security companies to publish a prospectus. At first glance a prospectus may seem overwhelming. The information in the prospectus is usually lengthy, packed with tables and graphs, and written in technical and legal language. This document is provided to help you make an informed investment decision before you invest in a mutual fund.

To gain the essential information you need, pay close attention the following key sections:

Investment Objective

A short statement of the fund's investment objectives. Some funds intend to achieve short-term growth while others might focus on long-term stability.

Investment Strategy

Exactly how the fund plans to accomplish the objectives. This section describes the types of assets that the fund purchases.

Fees and Expenses

Although mutual funds aim to make money for their investors, their ultimate goal, just like any other business, is to make money for themselves. In order to do so, funds charge their shareholders a variety of fees and expenses, all of which must be documented in the prospectus. A table at the front of every prospectus contains a breakdown of the different fees and expenses, along with a hypothetical projection of how the fees would impact a $10,000 investment over a 10-year period. This enables you to compare fees and expenses across mutual funds.

Account Information

This section contains very basic information about how to buy and sell shares and other account-related information. In addition to telling you how to get your money into the fund, the prospectus will also tell you how to take it out of the fund. The prospectus will inform you which redemption methods are available to you.

Risks

The level of risk that the fund takes and the risks that are associated with the specific investments made by the fund are one of the most important sections in the prospectus.

Performance

Information about the fund's performance over the last 10 years is included. Investors should be aware that past performance is not necessarily an indicator of future results. As important is how well the fund has traditionally performed compared to an index, such as the S&P 500. A fund's performance is also related to the fund's volatility, dividend payments, and turnover.

Management

The names the managers and some additional information about their experience and qualifications is reported. It can be helpful to know whether or not they have managed other funds in the past and their success or failure in order to get a sense of their past strategies and results.

Statement of Additional Information

Mutual funds split their prospectuses into two parts -- the "prospectus" (described above) and the Statement of Additional Information (SAI). In 1983, the Securities and Exchange Commission required mutual funds to supply much more detailed information about the fund. These are included in the SAI. For legal purposes it is assumed that you have read it. If you don't receive the SAI with the prospectus, you should request one. It provides great detail about the fund's board of directors, any limitations on the fund's investments, and the fees and expenses that are mentioned in the prospectus.