How to Read a Prospectus

October 11th, 2011, by

Q: When I receive a prospectus in the mail, I just throw it in the garbage. What should I be looking for when I receive these booklets?

Hazel Park, MI

A: It’s important you understand what a prospectus is and how it can help investors. The Securities and Exchange Commission (SEC) requires companies to file a prospectus that is intended to provide details about an investment offering being sold to the public. A prospectus will contain important facts for investors.

What you are probably getting is a prospectus from your mutual funds. The SEC requires fund companies to provide a copy of their prospectus to shareholders after they purchase shares. According to the SEC, there are two kinds of prospectuses: a statutory prospectus and a summary prospectus. The statutory prospectus is long. The summary prospectus is just a few pages long and contains key information about a fund.

Before tossing the prospectuses, look through them, because you’ll find some key information, including the fund’s investment objectives or goals, its strategies for achieving those goals and risks of investing in the fund. Most importantly—and this is, at the very least, the information you want to regularly check—both types of the prospectuses will include information about the fund’s fees, expenses and past performance.

Last modified: October 11, 2011 at 1:12 am