How to Read a Mutual Fund Prospectus

Raise your hand if you read the fund prospectuses that your mutual fund companies send you in the mail! 

I always ask my workshop attendees to do this and am never surprised when just a couple of hands go up. The reasons people don't even open the covers of these fascinating documents are simple: They can be intimidating and look pretty boring. Fortunately, neither of those assumptions are true. 

Prospectuses only appear complicated and scary because the type is small and they seem to have a lot of numbers in them. In reality--just as with almost any other type of financial document--once you've read a couple, you see that they follow a standard format and can be scanned pretty quickly for the information you need. 

I cannot emphasize enough that this process is absolutely critical. More than 90% of mutual funds in the marketplace underperform the S&P 500. You don't want to buy a fund that has a long-term history of lackluster returns, therefore, becoming comfortable with a prospectus is essential. It truly can make a difference between buying funds with so-so returns, or those that will perfectly meet your long-term investment needs.  

So just give me a few minutes of your time and I'll tell you how to quickly read these reports and go right to the nuggets of information you need to determine if the fund is the right one for you.  

But first let me say this: When you buy shares in a mutual fund--by law--the fund must give you a prospectus, but you should read it before you put your first dollar into the fund.  

Now, take out your prospectus and get ready to learn the tricks of the trade: 

Date of Issue: This should be right on the front cover. If the date is more than one year old, don't bother with the prospectus; just get a new one.

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