Mutual fund industry studies have shown that only about half of fund shareholders consult a prospectus before investing. With more than the estimated ten thousand mutual funds to choose from, many investors feel understandably overwhelmed when comparing possible investments, particularly when they have to wade through prospectuses that are often complicated and confusing. The Securities and Exchange Commission (SEC), however, has recommended new rules, including requiring the translation of fund booklets into easily understood language and the creation of a one-page summary -- a clearly-written, streamlined fund profile which includes all vital statistics.

The prospectus must be evaluated in order to ensure the investment's compatibility with the investor's financial goals and desired level of risk exposure. A typical prospectus should contain the following information:

Investment Objective - The heart of the prospectus is a description of the fund's investments and the portfolio manager's philosophy. The objective should outline the types of securities that the fund buys and the policies regarding the quality of those investments. For example, if the fund has more than 25% of its assets in one industry or holds bonds with ratings that would qualify them as high-yield (or, junk bonds), these policies must be noted in the prospectus. Essentially, all policies of the investment manager, as well as the objectives of the investment, must be stated clearly in this description.

Performance - The SEC has mandated that all fund performance be reported uniformly in every prospectus, thereby allowing a fair and accurate comparison between funds. Annualized performance over 1, 5 and 10-year time periods must be reported, along with exposure information and tax information. The portfolio turnover rate should also be shown, which reveals how actively the fund trades securities. The higher the turnover, the greater the fund's brokerage costs will be.

Risk - The prospectus must clearly state the risks that are inherent in the fund. For instance, a fund that invests in only one portion of the economy may offer greater risk than a highly diversified fund, while a fund that invests in well-established companies may be less risky than one that favors start-up companies.

There are other risks associated with certain types of funds or securities. Bond funds are susceptible to interest rate changes, while fixed-income savings and investment vehicles are subject to inflation risks. All of these must be described in the prospectus.

Fees - Funds are required to summarize their fees in a table at the front of the prospectus. Other charges to consider are minimum fees for subsequent investments or fees for switching from one fund to another in the same family. Management, accounting and administrative fees should also be evaluated. Generally, a company that keeps its expenses, excluding sales fees, at or below 1% of its assets is considered to be a low-cost fund. A fund whose expenses are above 1.5% of its assets is viewed as a high-cost fund. Fees earned by the portfolio manager or investment advisor should also be clearly identified under "Investment Advisory" fees.

Management - Professional fund management is one of the expected services when investing in mutual funds. Actively managed funds charge more than passively managed index funds. Additionally, management fees as a percentage of the total assets are generally lower for larger funds than smaller ones.

Services - This section details any additional features that may be available, such as check-writing or automatic investing.

Buying or Selling Shares - This section will explain how to get in and out of a fund and whether there's a charge for purchasing or redeeming shares. It will also describe the different classes of shares, as well as the costs and expenses associated with each class.

Statement of Additional Information - Also called Part B on the prospectus. This information must be provided free of charge upon request.

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