How to Read and Understand a Mutual Fund Prospectus

You can opt-out at any time.

Please refer to our privacy policy for contact information.

You can read about mutual funds in general anywhere (our Mutual Funds site is a great place to start). But if you want to read specifically about the mutual funds you own or want to own, the mutual fund’s prospectus is the place to find all the details.

A prospectus is so important, the SEC requires that investment companies give a prospectus to anyone that invests, and strongly encourages investors to request one beforehand. But most investors pay no attention. Why? It has lots of strikes against it: it’s usually thick and filled with jargon about a subject most of don’t really understand well enough to be interested in. It makes for reading that’s, admittedly, dull as dirt. But wise investors should make the attempt. A prospectus is legal proof that you were given all of the information an informed investor should need, which is why you should read and understand it.

So what should you pay attention to when reading a mutual fund prospectus? Here’s some of the most useful information you will find, and how to use it:

Minimum investment: All mutual funds will have an initial minimum and subsequent minimum investment amount—starting at around $2,500 to $3,000. I know, it sounds like a lot for the beginning investor. However these minimums may be waived if you are making regular investments through a 401(k) or other type of automatic savings plan.

Objectives: This tells you what the fund is attempting to do. Any mutual fund will have at least one investment objective clearly defined, or it may have a primary objective and a secondary objective. One stock mutual fund may try to achieve capital appreciation (growth), another will focus on income and preservation of capital, another will offer a combination of the two. The objective is kind of like the fund style—some funds focus on growth. others on income or value. etc. The important thing to understand here is the fund must follow its stated objective, sticking to it regardless of larger market moves.

Strategies and risk: The prospectus will detail how the fund will achieve it’s objective—the types of investments, industries and business sizes the fund will look to buy to meet its goal. It will also outline the risks associated with the strategy. It’s important to pay close attention to both when evaluating an investment. Understanding the types of companies a fund owns helps you with diversification. If you are going to invest your money in more than one fund, you want to make sure there isn’t a lot of overlap in the companies or investments those funds own. You also want to get a sense of how risky the investment strategies are. You may want a little risk, but know that what you’re getting is in line with what you need. Before you start allocating your money to different types of investments take a risk tolerance quiz to help assess you personal tolerance for risk.

Performance data: You’ll see the per share value of the fund, or net asset value (NAV). The NAV can help you calculate how many shares you will get for your money. You’ll also get returns for the fund over time compared to a similar benchmark. How a fund has performed in the past is no guarantee of how it will perform in the future. But you can get a sense of how the fund fits you. For example, if the up and down swings are huge compared to the benchmark, you may not be able to handle the fund’s volatility. And of course if the fund has never met or exceeded the benchmark, you can probably find a better option.

Fees and taxes: In a prospectus you will find the fund’s management fees and expenses. as well as any sales loads involved in buying or selling the fund. You will also get details on how the fund’s distributions are taxed. Are they treated for tax purposes as income or as capital gains. Fees and taxes can have a huge impact on how a fund performs over time, so make sure you understand this information before you invest.

Be on the lookout for front-end or back-end loads. These are sales charges that you’ll pay when you buy (front-end) or sell (back-end) shares. They can be expensive, and are not likely worth the extra price. Index funds. which don’t usually have loads and are among the cheapest funds you’ll find, tend to perform just as well as the more expensive actively managed funds. Also pay attention to the total operating expense for each share class. Class A shares of a fund may cost less than Class B .

If you’re the type who prefers Cliffs Notes. some fund companies can give you a summary prospectus that outlines the most important facts. And a site like Morningstar is a great source for getting an overview, analysis and comparisons, and even a handy star rating for most mutual funds.

But don’t just read the prospectus and forget it. Diligent investors need to check in often to see if fees, strategies and even objectives have changed. When you get a new booklet from your fund company, take a quick scan of the information. Does it still fit your personal goals and objectives?

Think of how smart you’ll feel once you’ve read a prospectus and know a mutual fund inside out. You’ll be the hit at all the cocktail parties! Just kidding, no one cares how much you know about mutual funds. But if you invest in them, you should.

Disclosure: The content on this site is provided for information and discussion purposes only, and should not be the basis for your investment decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.