It is important for investors to examine all information contained within an investment company’s prospectus. However, the four most important sections for investors are those that explain the fund’s goals and investment strategy; the level of risk associated with the fund; past performance; and fund fees. A prospectus outlines what a mutual fund offers and is legally required to contain certain information. A prospectus can be lengthy and appear somewhat overwhelming. Nonetheless, investors should take the time to read and understand some key sections of the prospectus to make an informed investment decision.

Included in a fund’s prospectus is a statement of the objectives, or goals, a fund seeks to attain. Generally, this section highlights what the fund is aiming to accomplish in terms of return on investment (ROI), the investment strategy it employs and what type of investment assets make up the bulk of its holdings. For some funds, the goal is to focus on long-term financial stability and regular income. Other funds focus on short-term or long-term capital gains opportunities. The extensive variety of available investment funds offers an array of choices sufficient to suit the preferred investing style of just about any investor, from very conservative income investors to value investors to high-risk, aggressive growth investors. It is important for potential investors to determine what their own financial goals are prior to making investments. The investor can then seek out a fund that matches his personal goals and one where he is comfortable with the proposed investment strategy.

For any potential investor, it is also important to know the level of risk a fund takes on with its investments. All investments involve some level of risk. This section of the prospectus, however, reveals the level of risk respective to the particular fund. Additionally, there are fund risk ratings available from rating firms such as Morningstar that evaluate a fund's risk level relative to the market average and other comparable funds. It is important for potential investors to find a fund with a risk level acceptable to them. Reviewing the risk information provided in a company’s prospectus allows each individual investor to compare his personal preference regarding risk/reward levels with that of the fund to determine if the fund is a good fit for him.

A prospectus also provides, unless the fund is brand new, information about the fund manager and the fund's past performance. This allows investors to easily review the fund's performance over the past several years and see how successful the fund has been in achieving its stated ROI goals. The performance information for the fund also enables investors to note things such as an unusually high portfolio turnover rate.

The fees associated with a fund are a very important factor to consider and can vary widely between funds. A prospectus typically includes a breakdown of all fees and expenses attached to the fund, and a projection of the impact fees have on different investment amounts over time. Looking at the fund’s expense ratio provides investors a clear basis on which to compare fund fees. Investors need to understand that an expense ratio of 1% refers to an amount equal to 1% of the fund's total value, not just 1% of profits.

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  2. What information should I focus on in my mutual fund's prospectus?

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  1. Prospectus

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  2. Final Prospectus

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  3. Single-Country Fund

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  4. Short Form Prospectus Distribution System - SFPDS

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  5. Statement of Additional Information - SAI

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  6. SEC Form 424A

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