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Mutual Funds

How to Read a Mutual Fund Prospectus

The mutual fund prospectus is your guide to understanding how your current or prospective investment may behave. Here's how the pros size up a mutual fund prospectus:

1. Start with the "investment strategy" section to see how the manager intends to invest your money. A prospectus can give a manager a lot of latitude.

2. Fees are often confusing. The bottom line on cost is "total annual fund operating expenses," expressed as a percentage. The average for diversified U.S. stock funds is 1.34%.

3. Look at the fund's worst year or quarter. Can you live with a result like that if it happens again?

4. Consider the fund's portfolio turnover, which shows how often the manager buys and sells securities. High turnover -- say, more than 70% -- can mean extra costs and higher taxes if you hold the fund in a taxable account.

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5. Some funds impose restrictions on large redemptions or on redemptions made soon after a purchase. Be familiar with these conditions.

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