How To Read A Prospectus - Risks And Past Performance
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.
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.