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Tips for Reading a Prospectus

A prospectus is a legally required document that describes a mutual fund and the company that operates it. It also holds important information that an investor should know about the fund before investing. Here is some of the helpful information that’s in a mutual fund prospectus.

Investment objectives or goals

Every fund has an objective, which is clearly spelled out in a prospectus. For example, "long-term capital appreciation" means the fund's objective is to grow an investment over the long term. Investors should consider funds with objectives that match their retirement savings goals.

Investment strategy

The investment strategy describes what the fund’s manager(s) will invest in that seeks to achieve the fund's objectives. For example, the strategy may include information on the portion of the fund that will be invested in stocks, or the minimum bond rating that will be considered.

Risks

Mutual funds, while generally considered more diversified than investing in a single stock, still carry risk. This section describes the types of risk investors may be exposed to by investing in the fund. Not sure what your tolerance for risk is when it comes to investing for retirement? Check out the Risk Tolerance Quiz.

Performance

This section is usually a chart that shows the fund's returns over the last 10 years, or since the fund’s inception if it's been around fewer than 10 years. It's important to review the fund’s past performance to determine whether the volatility of the fund is in line with your own risk tolerance. However, future performance will be different from past performance, so use caution when reviewing this information.

Fees and expenses

Fees associated with the fund must be disclosed. Expense ratio is shown in this section and provides details on the portion of the fund assets that pay for operating expenses and managed fees. Some fees are taken from the fund’s returns; this section will provide details on how fees are applied.

Find prospectuses for your retirement plan online:

  1. Sign on to your account
  2. Select Actions & Investments
  3. Select Research Investments
  4. Select Investment Literature