How to Read a Mutual Fund Prospectus
There is only one definitive source for information about a
mutual fund: its prospectus. The prospectus must be published
annually or more often by the fund provider. It contains all the
detailed data and information investors may need when choosing a
fund, including the following:
- Minimum investments -- Mutual funds differ
both in the minimum initial investment required and the minimum for
subsequent investments.
- Investment objectives -- The goal of each fund
should be clearly defined -- from income with preservation of
principal to long-term capital appreciation. Be sure the fund's
objective matches your objective.
- Investment strategies -- A prospectus will
outline the general strategies the fund managers will implement.
You'll learn what types of investments will be included, such as
government bonds or common stock. The prospectus may also include
information on minimum bond ratings and types of companies
considered appropriate for a fund. Be sure to consider whether the
fund offers adequate diversification.
- Risk factors -- Every investment involves some
level of risk. In a prospectus you'll find descriptions of the
risks associated with investments in the fund. Refer to your own
objectives and decide if the risk associated with the fund's
investments matches your own risk tolerance.
- Performance data -- You'll find selected
per-share data including net asset value (NAV) and total return for
different time periods as prescribed by Securities and Exchange
Commission (SEC) guidelines. Performance data listed in a
prospectus are based on standard formulas established by the SEC
and enable you to make comparisons with other funds. Remember that
past results do not guarantee future performance. When evaluating
performance, look at the track record of a fund over a time period
that matches your own investment goals.
- Fees and expenses -- Sales and management fees
associated with a mutual fund must be clearly listed. The
prospectus will also display the impact these fees and expenses
would have on a hypothetical investment over time.
- Tax information -- A prospectus will include
information on the tax status and implications of a fund's
distributions -- whether they will be treated as dividend income or
capital gains.
- Investor services -- Shareholders may have
access to certain services, such as automatic investment of
dividends and systematic withdrawal plans. This section of the
prospectus, usually near the back of the publication, will describe
these services and how you can take advantage of them.
The Summary Prospectus
A full prospectus may run 20 pages or more and it can be
difficult to tease out answers to common investor questions. The
SEC permits fund companies to issue simplified summary prospectuses
to help investors better understand their funds' key
characteristics. This is the general format for a summary
prospectus:
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Investment objectives and goals
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Fund fees and expenses
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Principal investment strategies, principal risks, and
performance
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Information about the investment managers
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How and from whom shares can be bought or sold
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Tax information
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How and by whom brokers, distributors, and administrators are
paid
You can receive prospectuses free from mutual fund company
websites and offices, and brokers, registered representatives, and
financial professionals who might deal in the funds' shares. Be
sure to read the prospectus and ask questions about items that you
are not sure about before investing. Your financial professional or
the fund company should be able to answer any questions.
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The profit earned from the sale of a capital asset, such as real estate or stocks. A capital gain is not "realized" until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on the owner's income tax return for the year in which the asset was sold.
The process of helping reduce risk by investing in several different types of individual funds or securities.
A percentage of a company's profits paid to its shareholders.
An investment vehicle representing a loan to a corporation, government entity, or municipality. Bonds typically pay a fixed interest amount on a predetermined schedule and return their investment principal at maturity. Bonds issued by the U.S. government are backed by the full faith and credit of the United States. Other bonds are backed by the financial strength of their issuers and carry varying degrees of credit risk.
The difference between what you paid for shares purchased and what you realize when you sell them.
The official document that describes a mutual fund to prospective investors. A prospectus contains information required by the SEC, such as investment objectives and policies, risks, services, and fees.
A collection of securities -- stocks, for example -- owned by a group of shareholders and managed by an investment company. Mutual funds pursue a variety of goals, depending on their investment charter. Some funds work to generate income on a regular basis, while others seek to provide capital appreciation.
A share of ownership in a company, typically traded on one or more exchanges. Owners of stock usually receive voting rights on issues affecting the company and may receive a portion of the company's profits in the form of dividends.
A measure of a fund's performance that encompasses all elements of return: dividends, capital gains distributions, and changes in net asset value. Total return is the change in the value of an investment over a given period, assuming any reinvestment of dividends or capital gains distributions, expressed as a percentage of the initial investment.
This is a service charge assessed by a broker or investment advisor and collected as part of the purchase or sale of an investment product or security. Commissions are a principal source of revenue for many firms and may cover the costs of providing investment advice as well as servicing the transaction. Commissions vary widely from brokerage to brokerage.
Content is provided by Wealth Management Systems Inc. as a service to Wells Fargo. Copyright © 2021, Wealth Management Systems Inc. All rights reserved.
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