A Few Key Items to Look for in a Mutual Fund Prospectus

These days, an overload of data is just a few keystrokes away. This is especially true when researching financial instruments. Let’s take a look at a few key items that you should focus on when researching a mutual fund that you may be interested in purchasing.

 This fund indicates it is a domestic stock fund with a $10,000 minimum (initial) investment and expense ratio of 0.04%.

This fund indicates it is a domestic stock fund with a $10,000 minimum (initial) investment and expense ratio of 0.04%.

In the fund’s prospectus, or disclosure pages online, you want to look for sections with titles such as Fund Facts, and Price & Performance, and Fees & Minimums. These areas will give you some vital information about the fund in which you may be interested in investing. Keep in mind that language and layout will vary from provider to provider. Key items to focus on are the fund’s asset class (it should fit into your portfolio goal), risk ranking (align with your personal risk tolerance), and fees (know what it costs you).

Let’s take Fund Facts for instance. Here you should find a quick breakdown of the fund and its general makeup. For example, you should find key details such as the fund’s asset class defining in what and where it invests, such as domestic or international, stock or bond. Look in this section for the fund’s ticker symbol or fund number. This area may also include the fund’s risk rating usually expressed as a number; less risk potentially less reward, or higher risk with potentially higher reward. You may also find in this section who manages or advises the fund.

 In this example, risk potential is indicated on a scale with 1 being lower risk and 5 higher.

In this example, risk potential is indicated on a scale with 1 being lower risk and 5 higher.

 This chart reflects fund performance over the past 10 years.

This chart reflects fund performance over the past 10 years.

In the Price & Performance area of fund disclosure, the information is pretty much what it seems. Here you can find historical price information and historical returns for the fund. Many providers include a graph or chart to show you a representative performance of say $1,000 or $10,000 had you invested at a particular time in the past. In this section you may also find the fund’s current price and its historical returns for 1-year, 5-year, 10-year, or even since inception. This performance is usually compared to the fund’s benchmark (the ideal against which the fund is measured).

To find out what it will cost you to start investing, and how much it will cost you thereafter, look in the Fees & Minimums section of the disclosure. Here you can find out what the minimum investment is to invest in the fund. Some funds have no minimums; others require a larger amount of say $2,500 or $3,000 or even $10,000. No two funds are the same. You should also look in this area for the fund’s expense ratio (sometimes expressed as ER). These days, the expense ratio should be fairly low, under say 1.5% or possibly lower. You also want to look to see if the fund charges 12b-1 fees (annual marketing or distribution fees), redemption fees (for selling your fund), purchase fees, or account maintenance fees. Funds may charge these fees and it is not an indicator that the fund is good or bad, just be aware of what you are paying for and how much. Generally, you should consider funds with low-to-no fees in these areas so you keep more of your returns over the time you own the fund.

Even with all of the disclosure available regarding a mutual fund these days, keep in mind the old adage that past performance is no indicator of future performance. Know that all investing involves risk, and you should always seek help if you are not sure about what you are doing. What’s your plan? As an independent Certified Financial Planner™, I can help you. No matter where you are in life, a CFP® professional can help you create a financial plan for today and tomorrow. #LetsMakeAPlan #CFPPro #talktometuesday #Hireaplanner #mutualfund #fees