Reading the Fund Prospectus

The fund prospectus is a legal document that must contain specific information about a mutual fund. The prospectus informs potential investors about the fund’s goals, fees, and expenses, and its investment objectives and degree of risk, as well as information on how to buy and sell shares. You can obtain a prospectus directly from the fund company or from a broker, financial planner, or other financial professional. After you narrow your fund choices to a handful of possibilities (three to five funds), request prospectuses for each and devote an evening to comparing them. A prospectus is usually not fun to read. The document contains a certain amount of jargon and some legal terms (despite recent rules by the Securities and Exchange Commission that encourage the use of plain English in the prospectus). But if you know what to look for, you’re likely to find that the prospectus contains a wealth of information that can help you decide whether the fund is right for you.
Information contained in the standard prospectus includes

• The investment objective of the fund
• Investments the fund manager is allowed to make, even if they may not fit the stated objective
• The financial history of the fund for the past ten years, or, if the fund is younger than ten years, for the life of the fund
• The minimum amount of money required to invest
• The sales charges (loads) associated with investing, and when they are payable — at the front end (on purchasing shares), at the back end (when selling), or both
• The fund’s operating expenses, including management charges, administrative expenses, and 12b-1 fees
• How to buy and sell shares and a description of shareholder services provided

Some funds have policies that allow the fund manager to invest in virtually anything — stocks, bonds, derivative securities, real estate, and what-have-you. I recommend that you avoid such funds, sticking instead with those that have clearly defined investment objectives.
The more prospectuses you read, the more familiar you can become with the terminology they use. By comparing prospectuses from several funds, you develop a sense of each fund’s different personality. You probably find that one fund feels more comfortable to you than the others, which may be a sign that you’ve found a good prospect for your first investment experience.