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In the United States, every traded security and every fund which invests in securities is required by the Securities and Exchange Commission (SEC) to provide a document called a prospectus to potential investors. This document describes the fundamentals and technical data about the stocks and their underlying companies, and functions as the primary sales pitch for that security or that fund. A fund prospectus will contain information about the stocks it invests in, what its specific goals are, and the degree to which it has met these goals over its history.
Most investors who buy shares in mutual funds have heard it said repeatedly that it is important to read the fund prospectus before investing. This is especially the case for the investor who has little or no experience investing in funds. Trying to make sense of a fund prospectus to extract the most important information is not always easy, and investors must know what to look for ahead of time.
Almost every fund prospectus will state the year in which it is issued. This is not insignificant, since funds are required to issue a new prospectus on a yearly basis with updated performance data. Make sure that the fund prospectus you have is the most recent issue. Next in line is the section which will detail the fund's investment objectives. Of course, every mutual fund's goals are to make money for themselves and their investors, but every investor needs to know whether they agree with how the fund wishes to pursue these goals.
Every fund prospectus will include detailed, ideally objective information regarding the level of risk inherent in the way that the fund invests. Charts and numbers describing the fund's past performance are also important to analyze. This may give the investor a good idea of the returns he can hope for, if the economic conditions hold which brought the fund its returns. Even more, it will allow the investor to make a judgment call on how competently the fund is being managed. Comparing prospectuses between funds gives investors an even better idea of which fund is best for them to invest in.
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