What you should know about a prospectus

Before you spend your hard earned money on a product or service, you like to know what you will be getting. The same holds true when you are investing in a mutual fund. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. You should learn what you can about a particular fund before agreeing to write a check. The information you need will be found in the prospectus.

A prospectus is a formal document, filed with the Securities and Exchange Commission, that provides the information an investor needs in order to make a decision. The prospectus must be given to the potential investor prior to a sale or it must accompany the confirmation of an initial sale. Mutual funds must have a prospectus to describe the fund's objectives, risks and other essential information.

An Objective Statement is usually found near the front of the prospectus. The statement is a summary of the mutual fund, detailing the goals of the fund and how it plans to reach the goals. Included in the objective statement are the risks involved in investing in a particular fund. By carefully reading the statement, the investor is better able to determine if the risks of investing in the fund are in line with risks he or she is willing to take.

Another section of the prospectus concerns Performance. Contained in this section is the information about how well the fund has performed during the most recent 1-, 5- or 10-year period. The information is important because it shows how well a fund has done in the past. However, past performance is no indication of how well a fund will do in the future. All funds, especially those investing primarily in stocks, will be subject to risks that may adversely affect returns.

The Performance section may also include a small section showing how a $10,000 investment may perform over time. You can get a general idea of how well your investment may perform, but the numbers may not include taxes and inflation and, therefore, not necessarily reflect your actual investment returns.

A prospectus must also include a section on Fees and Expenses. Mutual funds exist to provide an investment vehicle where individuals pool their assets to purchase securities. The fund companies offer professional management of that money and are paid for their services. The management fee is paid to the fund manager and is based on a percentage of the value of the fund's assets.

Another fee found in many funds is the 12b-1 fee that is collected by the broker/dealer to pay for marketing and distribution expenses. The amount of the fee can range from 0.25 to 0.75 percent of the fund's assets. An additional 0.25 percent of the average net assets may be paid as compensation to sales professionals for providing ongoing services to investors.

The prospectus contains a section on Risks. Investors who purchase shares of funds are subject to various risks, and it is possible to lose money by investing in the funds. An investment in a fund is not a deposit of any bank or other insured depository institution and is not insured or guaranteed by the Federal Deposit Insurance Corporation or (FDIC) or another government agency. Various types of risks investors may face are detailed in the prospectus.

Shareholder Information may also be found in a prospectus. This section details how to purchase shares and how to redeem them. In this section you will find out the minimum amount that may be invested as well as different ways to make that investment such as writing a check, automatic withdrawals or wire transfers. You will also determine ways to redeem your shares, such as by phone, wire transfer or written request.

You should read the prospectus carefully before deciding to invest in a particular fund. Your registered State Farm® agent may also be consulted prior to making such an important decision.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 260 KB) .

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AP2007/12/9704