Stock Market Basics > Mutual Fund Advice > Vanguard Mutual Funds Overview

Mutual Fund Prospectus: Reading and Learning

Your financial adviser has told you about a hot mutual fund that is a must buy and you're ready to follow their advice. Before you place the order, you might want to have a look at the mutual fund prospectus first.

So, what is a prospectus you ask? Its a publication the fund provides outlining the most important information concerning your investment, including the risks the fund takes.

There are a couple of things you should look for before buying:

Risks: What risks does the fund take in order to provide higher returns? Just because a fund returned 30% last year doesn't mean that it will be able to get that return in future years. The prospectus will warn you about that. If you are not comfortable investing in derivatives for example, you may decide not to invest in a fund that uses them as leverage.
Fund Type: What are the goals of the fund? Is this a growth fund or an income fund? This will help determine if you are adding more growth to your portfolio when you may be wanting to add more income funds.
Fund Strategies: How is the fund diversified? What stocks are they investing in, and what companies are they looking to invest in? Are they an active manager or use a buy and hold strategy? Can the fund hold more than 10% of a company in its holdings?
Fee's: Management Expense Ratios (MER's) can be costly. Remember, whether the fund manager makes you money or not, the fund manager is taking their fee. Make sure you find the right balance of fee and return. Are you investing in a front end load or back end load? What are the redemption fees?
Fund Manager Profile: Who is this guy that you are entrusting your money with? What experience do they have? How long have they been investing.

The prospectus will also include info such as minimum initial investment amounts, whether it can be held in a retirement fund and how to contact the company.

While the prospectus won't guarantee you won't lose money, at least you will have more incite into where this mutual fund manager is investing your money.