How Do I Interpret a Fund Prospectus?

A fund prospectus is usually broken up into various sections that include a management summary, the goals of the fund, and what the fund's managers are doing to accomplish those goals. Part of any fund prospectus is a section on the fund's financial performance and the expenses associated with trading its shares. When reading publications that contain investment information, an individual might want to consider factors such as share price, earnings per share, management experience and the underwriting company's net worth.

A common section in any fund prospectus is a summary or overview of the fund's performance during a certain period. That period is typically a year, but could be as short as four months. The summary section will usually provide an overview of the fund's mix of investment choices and what the managers did to avoid unnecessary risk. This is a good section for investors to get an idea of what the fund's goals are and whether they are compatible with their own.

Most investors are primarily interested in the section that provides figures and financial data. In this section, it is important to look at the fund's dividend policy and return percentage. Some investors may be looking for a fund that will provide income versus growth. A fund that has a history of paying out dividends tends to be steered towards providing supplementary income over a long-term gain. There can be sharp variation between the long-term and short-term performance of a fund, which is why a comparison is usually provided in the financial data section.

Share price is a vital piece of information that will normally be included in the financial section of a fund prospectus. Funds that are priced accordingly should be relatively close to market indexes and earnings per share. Investments are typically classified according to their main focus or market index. For example, funds that invest heavily in mid-sized, growing companies are usually referred to as mid-cap investments in the United States.

A detailed fund prospectus will provide a section that describes the background of the investment's management. The background of those who manage the fund's investments can be key, especially in terms of both education and experience. A fund that is managed by inexperienced individuals or a questionable brokerage firm can be a concern for investors who are seeking relative stability and high returns. While some funds do employ riskier strategies than others, the accounting methods and potential perspectives of the managers should be closely examined.