The Prospectus

Mutual funds are tightly regulated by the Securities and Exchange Commission (SEC). The SEC requires all mutual funds to publish a prospectus and issue a copy to all potential investors before they buy or along with the confirmation of their initial investment. The prospectus must explain the fund's objectives, management, fees, and past performance, and provide details of operation.

A FUND'S OPERATIONS
A fund's prospectus explains the programs and policies the management uses to achieve its investment goals.

As an investor, you have the right to vote on changes a fund proposes in its underlying financial policies, including the amount of money it can leverage, or borrow to make additional investments. Since mutual fund investors are actually shareholders of the fund, they vote in the same way corporate shareholders do, either in person at the annual meeting, by proxy, or online. And you vote on major issues, not on day-to-day matters like the fee structure.

IT'S IN THE FINE PRINT
A fund's prospectus includes:

Statement of objective
Investor programs
Fund fees and expenses
Fund performance history
Results of $1,000 investment
How to purchase shares
Shareholder services
How to redeem shares

While a prospectus provides all the details of a fund's operation, it also tries to portray the fund in the best possible terms. Smart investors carefully sift through all the information.

FEES
A summary of fees and expenses usually appears near the beginning of the prospectus. The fees can range anywhere from a low of 0.2% up to 8.5%, with bond and index funds typically at the bottom and international equity or emerging market funds at the top. Here are the types of fees you're likely to run into:

Sales charges, also known as loads, are levied by some, but not all, funds. The charges are typically figured as a percentage of the amount you invest. Front-end loads, charged at the time you purchase your shares, are the most common. Or, you may pay a back-end load, also known as a contingent deferred sales charge, when you sell shares during the first few years after purchase. A third type, known as a level load, has no front- or back-end charges but imposes an annual fee each year you own the fund.

When a fund offers you a choice of when to pay the sales charge, it typically identifies front-end loads as Class A shares, back-end loads as Class B shares, and level loads as Class C shares. You need to evaluate the comparative cost to determine which class makes the most sense for you.

Redemption charges are a type of back-end load some fund companies charge on certain of their funds to discourage frequent in-and-out trading.

Marketing fees (called 12b-1 fees) cover marketing and advertising expenses, and are sometimes used to pay employee bonuses. About half of all the mutual funds charge these fees.

Exchange fees may apply when money is shifted from one fund to another within the same mutual fund company.

PORTFOLIO TURNOVER RATE
All open-end mutual funds trade securities regularly — some more regularly than others. A fund's portfolio turnover rate reveals how much buying and selling is going on. The range can be enormous, with some funds turning over more than 100% annually. In general, high turnovers mean higher trading expenses. That means the fund needs higher returns to offset the cost.

BREAKPOINTS
A breakpoint is the amount of money you need to invest in order to qualify for a reduced front-end sales charge. Though that amount varies from fund company to fund company, a typical example is that you might pay 50 basis points, or half a percentage (0.5%), less once you invest $25,000, another 50 basis points less when you invest $50,000, and so on.

You may reach a breakpoint and qualify for the reduced fee with a one-time purchase. Or, if you, and in some cases you and members of your household, hold investments in the same fund or the same fund family, those cumulative assets may count toward the required breakpoint total. Funds aren't required to offer breakpoints, but if they do, they are obligated to make sure you get the reduction you're entitled to.

LEAPS AND BOUNDS
Funds report their results in a variety of graphs and charts. Funds have the potential to grow in value over the long term when distributions are reinvested. But they can also lose value.

leaps

In this example, a hypothetical investment of $10,000 grew at an annualized rate of 8% over 15 years. The results are not based on the return of any specific investment.

THE NUTS AND BOLTS
The prospectus also tells you how to buy and sell shares in the fund, as well as how to use all the fund's services.

Minimum investments exist for most funds. A higher amount is required for opening an account than for adding to it. Sometimes the minimum initial investment is as low as $500, sometimes as high as several thousand dollars.

Investment options let you buy online, over the phone, by mail, through a broker, or with automatic direct deposit.

Reinvestment options let you decide what to do with the money you earn. You can reinvest your distributions back into the fund, take the money in cash, or some combination of the two.

Exchange services let you transfer money from one fund to another that's registered in the same way.

Redemption options provide lots of ways for you to get your money out of the fund. They include checks, wire transfers, electronic transfers, and automatic withdrawal plans.

Check–writing privileges let you use checks to redeem your holdings or pay your bills. However, redeeming stock and bond funds by check has tax consequences, since there's always a profit or loss on your initial investment. Money market funds are the only ones that really work like checking accounts.

AND THE GADGETS
Most funds have automated telephone services that provide 24-hour information on every detail of an account. By using a series of codes, you can find out a fund's balance, current yield, price, and dividends. The same information is usually available online and with some handheld wireless devices.

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