Decoding the Mutual Fund Prospectus

The mutual fund prospectus is a document that is distributed by a mutual fund in order to provide information to the fund's shareholders. There is a lot of information conveyed in this report, and it is important that you understand what the fund is providing to you. Here are the basics of how to read a mutual fund prospectus.

Mutual Fund Prospectus

Before you invest in a mutual fund, you should get a copy of the prospectus and delve into it. In order to get a copy, you can request one directly from the mutual fund company. Many times, they can mail it to you or send it through an e-mail. If you are working with a financial advisor, she may have a copy of the prospectus for you also.

Investment Objectives

One of the most critical parts of the mutual fund prospectus is the investment objectives section. This section outlines exactly what the mutual fund is trying to accomplish. This section will tell you what types of securities are going to be invested in by the mutual fund. For example, an objective of a mutual fund could be to provide growth for the investors. Another common objective is to provide steady income to the investors. When you are looking at different mutual funds, it is important to go to this section to determine if it matches up with your individual investment objectives.

Investment Strategies

Beyond looking at the individual types of securities that are going to be invested in, this section gives you a more detailed look at the fund's investment strategies. This is going to cover things like asset allocation and whether the fund will invest in small-cap or large-cap companies. Two mutual funds could have the exact same investment objective, but the strategies they use to achieve this objective could be vastly different.

Past Performance

When you are reading a mutual fund prospectus, it is also important for you to check out the fund's past performance. The mutual fund prospectus is going to have a great deal of information about how the fund has performed over the last few years. It will most likely have charts and graphs as well as explanations of the performance over the years. You want to get a good idea of whether the mutual fund has performed up to expectations and whether it has beat the benchmark that it is trying to compare itself to.

Distribution Policy

You should also take a look at the fund's distribution policy. This will tell you how they are going to distribute profits to the shareholders. Sometimes they send a check, while other times, they will reinvest the money in the portfolio.

Expense Ratio

It is also important to have an idea of how much this investment is going to cost you. The expense ratio will tell you how much you are going to have to pay to cover the ongoing costs of the mutual fund management.

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