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I have to read a fund's "What?" before investing?

A mutual fund company must inform you to read their Prospectus before investing, but what is a prospectus?

A Prospectus is an offer to sell shares of a mutual fund. You are required to read the prospectus before investing because it contains pertinent information regarding the fund and the risks of the fund.

Topics the Prospectus should include:
Funds Goals: Does the fund invest in growth stocks or is it interested in stocks that produce income?

Funds Strategies: What is the fund's Asset Allocation and Diversification? What percent of the fund is invested in cash? What is the greatest percent the manager can invest in any one company? What is the fund manager's theory on deciding which stocks to buy or sell?

Operating Expenses and Fee's: Does the fund have a load (sales commission) or is it no-load? What are the operating expenses charged by the fund company? Are there any fee's or charges for withdrawing your money (redemption fees)?

Fund Manager(s): Who is running the fund? What is the manager's experience? How long have they been managing this fund? What is their financial experience?

Risks Involved: The prospectus should discuss the risks of investing. Your investment is not guaranteed. The fact that you can loose money. The phrase that you will always see, "the fund's past performance does not represent how it will perform in the future." In other words, just because the fund returned 25% last year, does not mean it will return 25% this year.

The prospectus should also include general information about the mutual fund company and policies:
What is the funds minimum initial investment? How can you buy and sell shares of the fund? How to contact the company? Special services and other information about the fund.

For more information, visit Basic Investing Guide

 

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