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. Trading

    What Is Your Risk Tolerance?

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

    How to Manage Risk in Your Personal Portfolio

    To best manage your portfolio, first determine your risk tolerance.
  3. Investing

    What You Should Know About Risk Tolerance and Risk Capacity

    When deciding how to invest, you need to consider your risk tolerance and your risk capacity.
  4. Investing

    Misconceptions About Past Performance And Future Returns

    Relying on an investment's past performance to guide your investment decisions is a losing strategy. Find out why.
  5. Investing

    Investor Risk Tolerance: Ability and Willingness

    Risk tolerance includes both the investor's ability and willingness to take on risk.
  6. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  7. 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
  8. Investing

    Diversify Your Portfolio With These 6 Essential Steps

    Follow these six essential steps to create a diversified portfolio within your risk tolerance.
  9. Investing

    What's a Benchmark?

    A benchmark is a standard investors choose to gauge the performance of their portfolios.
Frequently Asked Questions
  1. When are Beneficiaries of a Will Notified?

    Learn when the beneficiaries of a will must be notified, and understand how this requirement varies depending on whether ...
  2. Why Does Larry Page Pay Himself a $1 Salary?

    Google co-founder Larry Page continues to take an annual salary of only $1 as chief executive officer.
  3. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  4. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
Trading Center