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How to Read a Mutual Fund Prospectus

The mutual fund prospectus contains valuable information that you should by all means get familiar with before you invest. From the prospectus you can find out what the fund's investment objectives or goals are, what the investment strategies for their achievement are, the fund's fees and expenses, risk level, and past performance.

Here is what you read in a mutual fund prospectus:

  • The date the prospectus was issued.

    Mutual fund prospectuses should be updated at least once a year so you should make sure you get the latest version.

  • A file number.

    The file number starts with 811 and is located on the back page of the prospectus. The file number can be used to find documents that have been filed with the SEC - all the fund's filings in the EDGAR database are done with this number.

  • A risk/return table and a bar chart.

    The bar chart shows the annual total returns for the last decade. In case the fund is less than 10 years old, the bar will show the annual total returns for the life of the fund. The table sets forth returns for the previous 1-, 5-, and 10-year periods both before and after taxes.

    Have in mind that the bar chart and table of a multi-class fund will usually show only performance data and returns for one class.

  • Fee table.

    The fee table will show you the mutual fund's anticipated annual fees and expenses, including annual fund operating expenses and shareholder fees.

  • Information for shareholders.

    In this section you will find information on how purchase and redeem the fund's shares, what the tax consequences of this are, what the minimum initial or subsequent purchase amounts are (if there are such), and whether a minimum account balance should be maintained.

  • Financial highlights.

    Located typically near the back of the prospectus, this section can show you the fund's financial performance for each of the recent 5 years. Look here if you are interested in the net asset values, total returns, portfolio turnover rate, expenses to average net assets ratio, net income to average net assets ratio, etc.

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