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How to Read a Mutual Fund Prospectus

The mutual fund prospectus is your guide to understanding how your current or prospective investment may behave.

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.

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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.

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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