Before you invest in shares of a mutual fund, you should understand the nature of the investment you are making. The fund's prospectus describes the nature of the fund offering. Before investing in a mutual fund, you should review its prospectus to determine if the investment is appropriate for you.
Technically, a prospectus is a legal disclosure document filed with the Securities and Exchange Commission (SEC) that provides information that a person can use to make an informed investment decision.
A prospectus may run more than 100 pages in length, but some fund companies use a more concise "summary prospectus," which covers key information about the fund. Information may include the following:
- Investment objective (its overall investment purpose)
- Fees and expenses (such as sales charges, if any, management fees, 12b-1 distribution fees, etc.)
- Principal investment strategies (how the fund intends to invest to attempt to satisfy its investment objective)
- Principal risks, including a narrative description of the fund's risks and including an illustration of the fund's historical investment performance (including one-, five- and ten-year average annual returns)
- Portfolio managers
- Procedures regarding how to purchase and sell the fund's shares, including minimum investment amounts
- Tax information, including information about payments to persons who sell the fund's shares, if applicable