Two Sections In Mutual Funds Prospectus Are Must Read

Saturday, July 17, 2010, AM | Leave Comment

As we all know investing in equity mutual funds is a lot safer then investing in individual stocks. As a result, over the decades, investors have been pouring money into mutual funds. It’s your hard-earned money. You must know about the funds you are investing in. That’s how you can make sure a fund is buying the types of securities you expect. Because it so happens that sometimes the funds stray from their stated objectives and invest in securities other than described in their prospectus.

The way you can make sure a fund keeps on track is by monitoring periodical reports. Better yet, call the fund company and ask for the most recent top ten holdings.

Although incomplete, a fund’s stated objectives will at least give you an idea of what you may be getting into. You don’t have to read the whole prospectus. There are only two sections that you must read and be familiar with:

Statement of objectives

This describes the types of investments the fund makes, such as large cap or small cap companies, bonds, and international stocks. It also mentions the manager’s investment strategy – growth or income. Some fund families group many of their funds together in the same prospectus. Look for statements that relate to your particular funds.

Fee table

This relates to how much you will pay to buy and sell mutual fund shares. It will also tell you about 12b-1 fees that are used to pay for marketing, distributing and advertising.

One big caution…

  • Buy a domestic fund that has total operating expenses of less than 2%.
  • Buy a bond fund that has total operating expenses of less than 1%.

In a Nutshell
Whether you read the two sections in the fund prospectus or call the company for the top ten holdings, you must be on top of things. Take an active part in your investments.

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