You are about to invest in a fund. How would you get information
about this fund before you buy in? By law all funds must provide to
their prospective investors a legal document known as the prospectus.
The prospectus, normally a 20- to 40-page document, contains just
about everything that there is to know about the fund, or at least
everything that is legally required to be disclosed. This document is
written by accountants, lawyers, and financial professionals, so it is
perhaps one of the most dreaded documents an average investor could
read. Fortunately as required by newer laws, the prospectus nowadays is
required to spell out the essential facts about the fund in plain English.
The prospectus may also contain a Statement of Additional
Information (SAI) which gets into additional gory details about the
fund. Yes, the document may be boring, but it is your best tool available
to make an informed decision on whether or not you should invest in
the fund. Here is some of the information you can find in the
Objectives And Strategies - These sections explain the reasons for
the fund's existence. They are the philosophy, goals, and objectives of
the fund together with some general description of the strategy to reach
its goals. In broad terms a fund could have one of the three following
objectives or some combination of them: value, growth, and income.
These are also known as a fund's style. We will cover these a bit later.
Risks - This section contains explanations of the risks the fund may
be exposed to. For example, if the fund happens to be a growth fund, a
major risk would be that the stocks in its portfolio may underperform.
Other risks may include interest rate fluctuations, threat of inflation,
bonds in portfolio being called ahead of maturity, fund management
risk, and others. Most of the risk factors explained in the prospectus are …