The mutual fund prospectus came into being as a result of Federal legislation enacted following the stock market crash of 1929. The prospectus is a legal document filed with the Securities and Exchange Commission by the issuer of a security. It is designed to provide the investor with sufficient information, in writing, which would allow them to make a fully informed buying decision.
There are certain things you should look for in a prospectus prior to making any investment. The layout of most prospectus documents is fairly standardized to make them easy to use. Once you do this a time or two, you will be comfortable with the layout and will be able to move through it quickly. The main point here is that it is your money and you need to have this information. Knowledge is power.
- Name of fund and date of the prospectus, on the cover usually along with required cover and disclaimer statements (be sure to check the date to be certain that it is the most current version of the document).
- Statement of the Investment Objectives – There are basically three broad fund objectives, which you will likely see: protecting the value of the original investment; providing a stream of interest or dividend income; capital growth. This section will also detail the type of investments the fund will invest in to achieve its stated goal.
- Investment Risks – Given the historical perspective above, you will likely find that this language is cast very negatively. Read this section carefully. If you do not understand the risks you are taking, request additional information.
- Fees and Expenses – If entering a fee-based relationship, these fees are on top of your account fees. Here you will find examples that will allow you to compare the costs of investing in different classes of the fund with the costs of investing in other funds. The terms of each share class will likely be set forth in this section. Pay particular attention to the investment levels that will provide a breakpoint.
- The Fund's Management – This section provides the name and address of the fund's investment advisor and portfolio managers. This section will include a discussion of the fees, which are being charged to the fund for their services.
- Operational Issues – Again, here pay particular attention as this section will contain discussions regarding your rights as a shareholder, the terms and conditions under which you may buy, sell or exchange your shares, and how the price will be determined.
In addition to issuing the prospectus and keeping it current, the SEC requires all issuers to provide shareholders with periodic reports regarding how the fund or company is doing and what is happening to its investors. Additionally, as an investor you should receive a yearly statement detailing the federal tax status of your earnings from the issuer or from your broker dealer. Dividends and capital gains are treated as if the investors had bought the underlying securities themselves.
All investment products including mutual funds involve risk. Principal value and investment return will fluctuate, so an investor's shares/units when redeemed may be worth more or less than the original amount. A complete explanation of risks, charges and expenses may be found in the prospectus. Investors should carefully read and understand the information contained in the prospectus before investing or sending money.
