What is a mutual fund prospectus and how do I read it?
A mutual fund prospectus is a pamphlet or brochure that provides information about a mutual fund. Mutual fund companies must give potential investors a prospectus, free of charge, before they invest. You can get a prospectus by calling the mutual fund company directly or by visiting the fund's website. Before investing in a mutual fund, read the prospectus thoroughly so you can carefully consider its investment objectives, risks, fees, and expenses.
The prospectus will include information about the fund manager's objectives and practices. When reviewing a prospectus, you'll want to look at the kind of securities the fund holds and the kind of transactions it makes and how often. Make sure the fund operates in a way that's consistent with your own needs, investment goals, and tolerance for risk. For instance, if you need to invest for income and preservation of capital, and the prospectus describes the fund's investment policy as aggressive and growth oriented, then you haven't found a good match.
The prospectus will also tell you about expenses and fees. It will disclose specifics about sales charges and fees for management, distribution (12b fees), redemption, reinvestment, and exchange transactions that may be charged to you as a shareholder. It will also disclose the minimum required investment amounts and whether the fund is a load or no-load fund. Before you invest, gather this information from the prospectus so that you understand the cost of investing in the fund.