wearmanyhats

It happens often, you hear about a hot mutual fund.  To check it out right, and because everyone says you should do it this way, you call your broker and ask for a prospectus.  When it arrives, it seems to weigh twenty pounds and when you try to read it, your eyes glaze over.  Here are some tips on concentrating on the essential elements of what you need to know.

First, if there are multiple funds discussed in the prospectus, read only the sections that pertain to what you need to know.  For example, Fidelity Select Portfolios are all listed in one prospectus.   Find the area that pertains to the fund you in which you wish to invest.  Then concentrate on that area of the book.

The investment objective is very important because it tells you if the fund matches your investment objectives.  For example, if you want to acquire capital over a long period of time, then the investment objective should read “capital appreciation.”  If it is safety first, then the fund will read something like, “liquid capital” or “money market investing.”

Another area that you will need to check will be fees.  Most no load funds are so excellent that it is still amazing that there are any other up front or back end funds at all!  But there are,  and mostly because either investors don’t know any better or the manager is so good that the fees are offset by the return.  At any rate, the fees should be minimal.  If they are not, look at other funds.

After this, prospectuses vary widely, even in layout and scope of information presented.  Still, you should concentrate on the fund strategies and risks.  After that, peruse the performance.  Stellar returns are difficult to come by year after year, so three years in a row of double digit returns will be hard to continue.  Keep your expectations realistic.  Remember that not every fund is run by superstar investment gurus.  Some of them are run by mortals such as you and me.

Check out the various tables and charts that are sure to follow in the rest of the literature.  Be sure to look at the ones pertaining to your choice.  Finally, if you are going through a brokerage firm, you will probably be safe in skipping over the section on buying and selling shares, fund distributions, and excessive trading policies.  You will need to call your brokerage firm and discuss what these requirements are as funds set up different policies with different firms.  For example, Scudder Gold did not allow investments through Schwab for some time, but at times these kinds of funds will open up to new investors.  If you really wanted Scudder Gold, you needed to invest directily with Scudder.  So check with your brokerage first.

If you are directly investing with the fund group, then read those areas carefully.  Pay particular attention to policies on whether you can withdraw from the fund before a certain time period.  This is true if you go through a broker, too.  Know what the penalties are for withdrawing early.

Finally, know a little about the fund management.  If you want, check out that person’s name on the web, and listen to any interviews that s/he has given, or read articles on their management style. What have they done that you have liked or disliked?  Think about it this way, are they the kind of person  with whom you would entrust thousands of dollars ?  If the answer is “no,” then that is worth considering.

Prospectuses have a remaining myriad of other things to read, and it is best to scout each section for information you feel is relevant.  Although it is not light reading, thank your stars that the these documents are now required to be written in a common language, rather than the legalese that used to grace the pages.

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