Risks
Because investors have varying degrees of
risk tolerance, the risk section of a prospectus is very important. It details the risks associated with a particular fund, such as credit risk, interest rate risk, market risk, etc.

To get the most out of this section, you should be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in your overall
portfolio. For example, if a fund invests a large portion of its assets into foreign securities, you need to understand that this may pose significant foreign-exchange and country risk; but you also need to determine whether this kind of risk works with other types of risk in your portfolio in satisfying your tolerance.

Past Performance
This section shows you the fund's track record, but do remember the common disclaimer that "past performance is not an indication of future performance." Read the historical performance of the fund critically and make sure to take into account both long- and short-term performance. Also, make sure the
benchmark chosen by the fund is appropriate. For example, using the performance of federal treasury bills as a benchmark for an equity fund is useless; the S&P 500 is generally the accepted benchmark for equities. In addition, keep in mind that many of the returns presented in historical data don't account for tax, or some funds calculate an after-tax return with a rate that may be higher or lower than your own. Be sure to look at any fine print in these sections, as they should say whether or not taxes have been taken into account.

Distributions, Fees And Management

Related Articles
  1. Investing

    Digging Deeper: The Mutual Fund Prospectus

    The legal jargon of this document can be daunting. Find out how to get to the important stuff.
  2. Investing

    January: Time To Read Your Mutual Fund's Annual Report

    Don't let this valuable piece of mail end up in your trash can. Here are five things you need to know.
  3. Trading

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  4. Investing

    How to Manage Risk in Your Personal Portfolio

    To best manage your portfolio, first determine your risk tolerance.
  5. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  6. Managing Wealth

    Should Balanced Funds Be Part Of Your Portfolio?

    Find out why you should include balanced funds in your portfolio, including the importance of customizability, diversification and professional management.
  7. Investing

    Your Mutual Fund: It's Riskier Than You Think

    Fund managers often take on more risk than they should, putting business ahead of fund holders' interests.
  8. Financial Advisor

    Why the Top-Performing Fund Isn’t the Best Choice

    The top-performing mutual fund or ETF isn't often the best choice for your portfolio. Here's why.
  9. Investing

    How to Select and Build a Benchmark to Measure Portfolio Performance

    How to select and build a benchmark to measure the performance of your investment portfolio
Frequently Asked Questions
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
  2. My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, $10,000 distributions?

    You and your spouse each qualify for a penalty-free distribution of up to $10,000 for the purchase, acquisition or construction ...
  3. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
  4. Who manages the assets in a Roth 401(k) account?

    Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...
Trading Center