Reading a Prospectus

The prospectus is what is given to you by your financial advisor or broker when you decide to invest in mutual funds. It is very important that you read the prospectus because it contains some vital information regarding your investment.

The information that you can expect the prospectus to contain is the investment objective of the fund, the strategies that are going to be used to meet the objective, the risks, past performance of the fund, and its fees and expenses. You will also see who the fund's managers are, who the advisors are, and how shares are purchased and redeemed.

Although the prospectus may seem rather daunting when you first look at it, you can expect to gather a lot of valuable information. Much of this information is required by the SEC. For instance, the categories that exist are there because the SEC demands it and the SEC also requires that the fees and past performance are present. This is so you know whether or not you are making the right investment for you. This information is also present so that you can easily compare different funds such as money market funds and make a conscious buying decision.


The first category you will see is the date of issue. This will be on the front cover of your prospectus. You should receive a new prospectus once per year, so make sure you are looking at one that is up-to-date. Any small changes in the fund, as well as its income information, will vary from year-to-year.

The second category you will see is a chart showing the risk and the rate of return. You will see this after the description of the fund, which also tells you about goals, strategies, objectives, and risks. The chart will show you the annual rate of return for the past 10 years. If the life of the fund is less than 10 years, you will see the annual rate of return for that period of time.

You may also notice that there is a table that shows returns after taxes at the 1, 5, and 10 year marks. What these tables do is allow you to compare to other funds. The SEC requires this so that a person is well informed of their options. There are also a number of footnotes that you will want to read.

The next section is the fee table and this is going to tell you what kind of fees you're going to be paying on your fund. These are the anticipated fees and expenses that occur on an annual basis. The fees include annual operating expenses, shareholder fees, and any other applicable expenses. This is also a tool that allows you to compare the mutual fund costs.

The financial highlights section is near the back of your prospectus and contains the performance of the fund for the past 5 years. You'll find the net asset value, various ratios, total returns, and the ratio of the net assets to the expenses. You will also notice the portfolio turnover rate and the ratio of average net assets to net income.

Shareholder Information

The shareholder information section is the part that is going to tell you how to purchase and redeem your shares. This will also tell you if you need to maintain a minimum account balance. If there are any minimum purchase amounts, that information will be provided as well. Reading a prospectus will also tell you about any tax consequences that exist, which will help you determine when is and when isn't a good time to carry out certain types of transactions such as selling, holding, or exchanging.

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