Making Your Way Around the Prospectus
By: Source: AARP.org Date Posted: 2005-03-20 12:08:55
A prospectus is a document that gives investors important information about a mutual fund. By law, every fund must publish and distribute this document.
What You Should Know
Every mutual fund's prospectus will look a little different. However, the Securities and Exchange Commission (SEC) requires that all mutual funds give you the information that is outlined in the table below.
Some of the information that is required by the SEC must be presented in tables at the beginning of the prospectus. Other information will appear in the written information provided in the rest of the report.
Here's a chart explaining what's in a mutual fund prospectus:
| Required Information | Where You Find It | What to Notice |
| The fund's investment objective and the investment strategy it will follow to reach that objective | In the written information | Make sure the investment objective meets your own personal objectives. The prospectus must identify the kind of investments the fund can make. See the "Statement of Additional Information" for a list of the specific stocks and bonds that the fund owns. |
| Risks associated with the fund | In the written information | Make sure you understand all the dangers associated with a fund's investing style. |
| Fees and expenses | Standard Fee Table | Note the expense ratio. This is the ratio of total expenses to net assets. The lower the number, the lower the fees. |
| Example of Fees and Expenses | On or near the Standard Fee Table | A fund must give you an example of what fees it would charge on a $1,000 investment, assuming a five-percent annual return. |
| The fund's past performance | Financial Highlights Table | Note the total return over the past 10 years. Remember that good past performance does not guarantee good future performance. |
| Turnover Rate | Financial Highlights Table | This will tell you what percent of your fund's portfolio is sold each year. A high number may indicate that the fund also has high transaction costs. |
| The appropriate index with which you can compare the fund's performance | In the written information | A fund must identify the index to which it compares its performance. It may also provide a table showing how the fund's performance compares with the index. |
| Management | In the written information | If you're not satisfied with the information that you read here, see the "Statement of Additional Information." |
| Housekeeping Information | In the written information | The fund must tell you how to open an account and redeem your shares, and what services it offers. |
For More Information
The Alliance for Investor Education
You can test your knowledge about mutual funds on a Web site run by the Alliance for Investor Education. The site also features a mutual fund fee calculator and a "Guide to Understanding Mutual Funds."
URL: http://www.investoreducation.org
The Securities and Exchange Commission (SEC)
The SEC Web site offers a variety of useful information for investors. Under "Investor Education," look for online publications about mutual funds and Interactive Tools, including a Mutual Fund Cost Calculator that will help you compare the true dollar cost of mutual funds. Use the EDGAR Database (listed under "SEC Filings and Forms") to find and read a mutual fund's prospectus.
URL: http://www.sec.gov
The Investment Company Institute (ICI)
ICI is a trade organization for the mutual fund industry. The group publishes a host of information about mutual funds, including: "A Guide to Understanding Mutual Funds" and "Mutual Fund Fact Book."
URL: http://www.ici.org
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