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Why Read a Mutual Fund Prospectus?

Fund prospectuses look as if they’re intentionally designed to be as unappealing as possible to potential readers. They’re generally printed on low-grade paper, have no color, and are packed with charts, tables, and numbers that are difficult for many investors to understand.

At the same time, they’re usually paired with a nice, glossy brochure about the fund. No surprise, then, that so many investors tend to toss the prospectus straight in the recycle bin, while looking instead at the picture-filled brochure.

Guess which one has the useful information?

The brochure is simply marketing material. It’s (for the most part) only going to contain the facts that make the fund look good.

The prospectus, on the other hand, is required to include certain pieces of information. A few helpful nuggets that you’ll find in a prospectus:

  1. Portfolio turnover rate
  2. Expense ratios and other expense information (charges incurred for redeeming shares, for example)
  3. Size of the fund
  4. Asset allocation of the fund (This is typically expressed in a range, such as “up to 20% of fund assets may be invested in international equities.”)

Conveniently enough, these are precisely the factors to look at when selecting a fund. 🙂

Next time you’re considering investing in a fund, don’t let the fund company choose which facts do or don’t see. Go straight to the prospectus instead, and get the facts for yourself.

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Comments

  1. Excellent article pointing out the importance of looking through the prospectus. I think that most people would be surprised how readable they are.

  2. Good advice. This falls in line with the logic that you should never invest in something you don’t understand.

  3. Hi Ken. Thanks for stopping by to comment.

    You’re precisely right. After a taking the time to read a prospectus, you’ll have a darned good idea of what exactly it is that you’re investing in.

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