What Is a Mutual Fund Prospectus?

A prospectus is an invaluable information source for any investor in an open-ended mutual fund. It's your key to the assets, management, and investment strategy of the mutual fund.

Prospectus basics

The prospectus is the document that describes a mutual fund. All mutual funds must provide prospectuses to whoever requests them. Although it contains information investors need to evaluate a fund, the prospectus is not an advertising piece and cannot actually advise people to invest in the fund.

A mutual fund prospectus contains information about the fund's objectives, its holdings and performance, its management, and its expenses. It also contains a shareholder's manual that explains the details of buying, holding, and redeeming shares in the fund.

Why you should read the prospectus

Although prospectuses can make for rather dry reading, it is important that you read the prospectus before you invest in a fund. The fund's management team, objectives, and performance history—and much more—are included so that investors will have a clear understanding of the investments they are choosing.

It may sound surprising, but today's prospectuses are easier to read than those of the past. Their language gets simpler as time goes on. However, much of the legal and financial language used in prospectuses is there to protect the investor from misconstruing the nature of the fund and its operations. Prospectus language must be exact, and its words must be very clear.