There is only one definitive source for information about a
mutual fund: its prospectus. The prospectus must be published
annually or more often by the fund provider. It contains all the
detailed data and information investors may need when choosing a
fund, including the following:
- Minimum investments -- Mutual funds differ
both in the minimum initial investment required and the minimum for
- Investment objectives -- The goal of each fund
should be clearly defined -- from income with preservation of
principal to long-term capital appreciation. Be sure the fund's
objective matches your objective.
- Investment strategies -- A prospectus will
outline the general strategies the fund managers will implement.
You'll learn what types of investments will be included, such as
government bonds or common stock. The prospectus may also include
information on minimum bond ratings and types of companies
considered appropriate for a fund. Be sure to consider whether the
fund offers adequate diversification.
- Risk factors -- Every investment involves some
level of risk. In a prospectus you'll find descriptions of the
risks associated with investments in the fund. Refer to your own
objectives and decide if the risk associated with the fund's
investments matches your own risk tolerance.
- Performance data -- You'll find selected
per-share data including net asset value (NAV) and total return for
different time periods as prescribed by Securities and Exchange
Commission (SEC) guidelines. Performance data listed in a
prospectus are based on standard formulas established by the SEC
and enable you to make comparisons with other funds. Remember that
past results do not guarantee future performance. When evaluating
performance, look at the track record of a fund over a time period
that matches your own investment goals.
- Fees and expenses -- Sales and management fees
associated with a mutual fund must be clearly listed. The
prospectus will also display the impact these fees and expenses
would have on a hypothetical investment over time.
- Tax information -- A prospectus will include
information on the tax status and implications of a fund's
distributions -- whether they will be treated as dividend income or
- Investor services -- Shareholders may have
access to certain services, such as automatic investment of
dividends and systematic withdrawal plans. This section of the
prospectus, usually near the back of the publication, will describe
these services and how you can take advantage of them.
The Summary Prospectus
A full prospectus may run 20 pages or more and it can be
difficult to tease out answers to common investor questions. The
SEC permits fund companies to issue simplified summary prospectuses
to help investors better understand their funds' key
characteristics. This is the general format for a summary
Investment objectives and goals
Fund fees and expenses
Principal investment strategies, principal risks, and
Information about the investment managers
How and from whom shares can be bought or sold
How and by whom brokers, distributors, and administrators are
You can receive prospectuses free from mutual fund company
websites and offices, and brokers, registered representatives, and
advisors who might deal in the funds' shares. Be sure to read the
prospectus and ask questions about items that you are not sure
about before investing. Your advisor or the fund company should be
able to answer any questions.