You may be asking yourself, "Why would I ever need to read a prospectus?" It's a fair question, prospectuses can be complicated and dense. But as we all know a little research goes a long way.

Before you invest in a mutual fund, you’ll want to make sure that you’re equipped with facts such as the fund’s goals, strategies, and level of risk. You can easily find this information, and more, in a single document known as a mutual fund prospectus.

What is a mutual fund prospectus?

It’s a formal document required and regulated by the Securities and Exchange Commission (SEC), that describes the details of a mutual fund. Funds must provide shareholders with a prospectus, but you can and should request one before you invest. Because mutual funds must update their prospectuses at least once a year, make sure you have the latest version in hand.

What information does it provide?

It contains a wealth of information from how to purchase shares to how to redeem them. It also details the fund’s objectives, strategies, degree of risk, fees and past performance. It’s standardized format also makes it easy to compare funds.

Points of Interest

These are some key points to consider when reading a fund’s prospectus.

Investment objectives

The prospectus outlines the fund’s goals. It also describes the kinds of securities the fund will purchase in order to achieve its goals. With this information on hand, you can determine whether or not the fund is in line with your personal investment strategy.

Level of risk

This section of the prospectus details the risks associated with the securities a fund holds, which allows you to better match your tolerance for risk.

Cost of the fund

Included in the prospectus are tables describing the fund’s fees and expenses, which include the shareholder fees (charges incurred when you make a transaction) and annual fund operating expenses. One table includes a hypothetical example with specific dollar costs to help you compare among different funds. Another table lists ongoing annual fund operation expenses that are deducted from the fund’s assets (and your return).

Past performance

Annual Returns

This section contains a bar chart that shows the fund’s annual returns for the past ten years, or since the fund's inception if it does not have a ten-year history. It also includes a table that displays both before, and after, tax returns for the past one, five, and ten-year periods. The returns for the fund's benchmark index are also included in the table, so you can see if the fund has outperformed the index over time.

Financial Highlights

This section shows the fund’s most recent performance.

Fund management

The prospectus also provides information about the current fund manager’s investment strategy. You may want to consider how the fund’s management will affect fees and returns. As a side note, passively managed funds generally have lower fees.

Regardless of which mutual funds you choose to invest in, be sure to do your homework so that you can make informed and educated decisions regarding your retirement account.