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| Reading a Prospectus |
| Reading a mutual fund prospectus is enough to give even lawyers a headache. |
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| All too often they're dull and wordy and hard to understand. Still, you can pick out some important information from a prospectus. Here are the six things you should dig out of a prospectus before buying any fund. |
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| 1. Investment Objective |
| Why the fund exists in the first place. For instance, is the fund trying to make money over a long-term period, or is it trying to pay its shareholders a little cash each month? |
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| 2. Investment Strategy |
| What types of investments (small-company stocks, government bonds, etc.) the fund invests in to meet its objective. |
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| 3. Risks |
| The most important section. All investments have risks, and even the prospectus won't list all of them. But make sure you understand as much as possible about the dangers involved with a fund's investment style before buying shares. |
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| 4. Costs |
| You should know if the fund has a sales charge, and how much the fund takes out of your return each year to pay for running the fund. The higher a fund's fees, the less of its return you keep. |
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| 5. Performance |
| How well the fund has done in the past compared with at least one index (make sure it's an appropriate one) and similar funds. A good record doesn't guarantee the fund will continue to do well, though. |
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| 6. Manager |
| The names of the folks who decide what investments the fund will buy and sell. You'll want to see how long they've been managing the fund and whether or not they manage other funds. If they do, you might want to see how well their other funds have performed. |
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| Finally, the prospectus tells you how to open an account with the fund, what the smallest amount of money you can invest is, how to buy and sell shares, and how to contact someone to help you, if you need it. For even more information on your fund, you can read the Statement of Additional Information (SAI), which tells you things like who sits on a fund's board of directors (they're there to represent you, the shareholder) and how fees are spent. |
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