How to read a mutual fund prospectus

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There is only one definitive source for information about a mutual fund: its prospectus. The prospectus is issued by the fund provider and it contains all the detailed data and information investors may need when choosing a fund. With a little basic knowledge of the information contained in a prospectus, you can make effective use of this valuable document.
All necessary information is contained in every mutual fund's prospectus. Take a look at these key elements:
  • Date of issue — First, verify that you have received an up-to-date edition of the prospectus. A prospectus must be updated at least annually.
  • Minimum investments — Mutual funds differ both in the minimum initial investment required and the minimum for subsequent investments.
  • Investment objectives — The goal of each fund should be clearly defined — from income with preservation of principal to long-term capital appreciation. Be sure the fund's objective matches your objective.
  • Investment strategies — A prospectus will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.
  • Risk factors — Every investment involves some level of risk. In a prospectus you'll find descriptions of the risks associated with investments in the fund. Refer to your own objectives and decide if the risk associated with the fund's investments matches your own risk tolerance.
  • Performance data — You'll find selected per-share data including net asset value (NAV) and total return for different time periods as prescribed by SEC guidelines. Performance data listed in a prospectus are based on standard formulas established by the SEC and enable you to make comparisons with other funds. Remember that past results do not guarantee future performance. When evaluating performance, look at the track record of a fund over a time period that matches your own investment goals.
  • Fees and expenses — Sales and management fees associated with a mutual fund must be clearly listed. The prospectus will also display the impact these fees and expenses would have on a hypothetical investment over time.
  • Tax information — A prospectus will include information on the tax status and implications of a fund's distributions — whether they will be treated as dividend income or capital gains.
  • Investor services — Shareholders may have access to certain services, such as automatic investment of dividends and systematic withdrawal plans. This section of the prospectus, usually near the back of the publication, will describe these services and how you can take advantage of them.

The summary prospectus

A full prospectus may run 20 pages or more and it can be difficult to tease out answers to common investor questions. The SEC permits fund companies to issue simplified summary prospectuses to help investors better understand their funds' key characteristics. This is the general format for a summary prospectus:
  1. Investment objectives and goals
  2. Fund fees and expenses
  3. Principal investment strategies, principal risks, and performance
  4. Information about the investment managers
  5. How and from whom shares can be bought or sold
  6. Tax information
  7. How and by whom brokers, distributors, and administrators are paid
You can receive prospectuses free from mutual fund company websites and offices, and brokers, registered representatives, and professionals who might deal in the funds' shares. Be sure to read the prospectus and ask questions about items that you are not sure about before investing. Your professional or the fund company should be able to answer any questions.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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