Breeze Through a Fund Prospectus

Use our guide to focus on what's important to make this task less daunting.

- NELLIE S. HUANG

WE GET IT: NO ONE WANTS TO READ A fund prospectus, and few investors ever do. “I can tell you precisely how many clients read the prospectus: zero,” says Lew Altfest, chief executive of Altfest Personal Wealth Management, a New York City–based investment manager.

But reading a fund’s prospectus is an important step in making a good investment that’s right for you. The trick is to focus on specific bits of information about a fund that are listed in the prospectus: the fund’s objective, its investment approach and potential risks, the fees it charges, and the tenure of the manager. If you know where to look for these tidbits, it makes the task of reading a prospectus simpler. We’ll tell you where to find them.

But which document should you read? Some funds issue two prospectuses, a “statutory” one, which is the traditional, long-form document, and a “summary” prospectus, a simplified version. Both have what you need to know, but stick with the more readable summary, if it’s available.

Investment objective. Typically just one sentence long, the fund’s objective is usually found at the beginning of the prospectus. Often, a fund’s aim is focused on either growth (capital appreciation) or income (capital preservation), or sometimes a combination of the two. That matters because it can be a clue to how much risk the fund takes.

Funds with a growth focus will likely invest in stocks, focusing on those its managers believe have the best prospects to increase in value. For example, American Funds’ The Growth Fund of America invests only in stocks. Its investment objective is “to provide you with growth capital.”