Basically, a mutual fund prospectus is a document detailing the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund’s past performances, managers, and even financial information.
You can get these documents directly from the mutual fund companies through email or phone. If you want, you can get them through a financial planner or advisor. There are also PDF copies provided by many mutual fund companies on their websites.
The prospectus is a legally binding contract between the fund and the fund holder. You can easily get lost in all the legal jargon and maybe miss the information that really matters to you. The following are the sections which you should really carefully pay attention to.
Investment Goals
The fund has financial goals and these goals are reflected in the kinds of securities that are selected to achieve the same. Examples of investment goals include long-term capital growth, stable income, high total return, and others.
Mutual fund companies cannot really change these goals or objectives the investor – you – consent to the changes through a vote. You have to ensure that the fund’s goals are in line with your own investment goals.
Investment Strategies
In this part of the prospectus, the fund explains how it allocates and manages its resources to achieve its investment goals.
There are factors or aspects considered when developing a strategy and these aspects include setting net asset value goals, determining asset allocation, defining investment restrictions, and deciding whether and how derivative instruments may be used in the fund.
Just like when considering the fund’s investment goals, the investment strategies promoted by the fund should also be aligned with your investment style.
Risk of Investing in the Fund
Since investors have different levels of risk tolerance, the risk section of the prospectus is extremely important. It details the risks associated with the specific fund, like interest rate risks, credit risks, market risks, and so on.
To thoroughly absorb what are written in this section, you should be familiar with the distinctions between different kinds of risks and why they are linked with the specific kinds of funds. Also, consider how their fit in with the balance of the risks in your overall portfolio.
Past Performance
In the prospectus, the past performance shows you the fund’s track record. However, you have to bear in mind the disclaimer that “past performance is not an indication of future performance.”
Read and analyze the past performance of the fund with a tabful of salt and take into account both the long and short-term performance. Check if the benchmark used by the mutual fund is appropriate.
On top of those things, remember that many of the returns presented in historical data do not account for tax or some fund calculate a return after tax that may go higher or lower than your own. Search for the fine prints of these sections to figure out whether or not taxes have been taken into account.
