You've found what you think is a stellar fund, and you're ready to invest. But there is one more thing you absolutely must do before sending that check to the fund company.
It's time to read the fine print: the fund prospectus.
The prospectus is your guide to the nuts and bolts of a mutual fund. You'll find a fund's description, shareholder information and services offered. Now that fund companies make prospectuses available on their Websites, it's easier than ever to read up on a fund.
Fund prospectuses won't win any literary prizes, but they are an investing must-read. The documents can run on and on, so we've highlighted the key areas you need to make sure you read.
1.Investment objective: This is what the fund does with its assets. A fund's name is not always a clear indication of its strategy, but in this section you will get more details. Terms such as "seeks capital appreciation" or "invests for income" will give you a better idea whether the fund meets your objectives. You will also find out what specific benchmark the fund is trying to beat. For example, in the prospectus for Fidelity's Equity Income Fund, one aim of the fund is to "exceed the composite yield of the Standard & Poor's 500 Index." This tells you the fund holds mainly large-cap stocks.
2.Financial highlights: How the fund has performed in the past. This section will discuss the fund's NAV (net asset value), total returns, portfolio turnover rate and dividends. This information should be compared with the number's reported by similar funds, and it will give you a guide to how much you might earn from the fund and the potential taxes you might pay.
3.Fees and expenses: Don't skip this section -- it is one of the most important parts of the prospectus. Fees and expenses constitute the costs of operating the fund, including management fees, 12b-1 marketing fees and "other expenses." This information comes in the form of percentages, but fund companies are also required by law to show fees in real dollar amounts over 1-year, 3-year, 5-year and 10-year periods. For example, investing $10,000 in Vanguard's Asset Allocation fund (assuming a 5 percent return) will cost you $157 after three years. Again, compare the fund's numbers to those of similar funds.
4.Other need-to-know info included in the prospectus:
- The fund's name, number and trading ticker symbol.
- Contact information for the company -- mailing address, Website address, phone numbers; also account access information and hours when you can reach customer service representatives.
- Minimum investment requirements -- should be listed for regular accounts, retirement accounts and accounts you set up for children. You should also find information about setting up an automatic investment plan.
- Account ownership information, including how to buy and redeem shares and what fees may be involved.
- Fund manager bios as well as their tenure with the fund.
For more information on mutual funds, see:
•Types of Funds