How to Read a Mutual Fund Prospectus

As a mutual fund investor (or a potential mutual fund investor), you may be aware of the valuable information provided in the fund’s prospectus. While the prospectus tends to serve as a selling document for the fund, it provides investors with pertinent information, including the fund’s objectives and strategies, past performance, risk, fees, expenses, and more. While reading a prospectus may seem daunting to a new investor, the prospectus (per SEC requirements) is broken into specific categories to present the key data in a structured manner. This way, investors can readily compare different funds.

The Purpose of the Mutual Fund Prospectus

A mutual fund prospectus is a document, required by the Securities Exchange Commission (SEC) to outline the objectives, risks, fees, and other information for an investor to make an informed decision about investing in a mutual fund. The prospectus can be obtained directly from the fund companies either through the mail or through PDF versions on the company’s website. While they way in which the prospectus is organized can vary, the prospectus must contain the following sections:

Investment Objective: This is a short statement regarding the goals of the fund. Examples of these goals would be short-term growth, long-term growth, income or maximum total return. Fund companies are not permitted to change the fund’s stated objectives without the consent of its investors.

Investment Strategies: This section explains how the fund will accomplish its objectives by outlining the parameters in which the fund will operate, an asset allocation strategy, and whether it will use derivatives as part of its strategy.

Risk of Investing in the Fund: This section discusses the level of risk the fund will take in order to meet its objective. This is a particularly important section in that the investor should be sure that the level of risk described in the document is consistent with their risk tolerance.

Fees and Expenses: The company may charge the investor a number of fees and expenses in exchange for managing the fund. It is through these charges that the company makes money. The funds charges are broken down in a way that makes expense comparison to other mutual funds very easy.

Fund Management: This section will name the manager(s) of the fund and the experience they bring. Potential investors may want to know about management’s experience and levels of success or failure with other funds.

Past Performance: this section outlines the performance of the fund over the past ten years and compares these results against the performance of an appropriate benchmark (e.g. the S&P 500). The common disclaimer in this section is that “past performance is not necessarily an indicator of future results”.

Distribution Policy: The distribution a fund offers can be in the form of dividends, capital gains, interest or other income. The fund’s distribution policy describes how these payments are made to investors. Investors need to be aware of the tax implications associated with these distributions.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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