Understanding a Fund Prospectus

When investing in a mutual or exchange-traded fund (ETF), you may wonder how to understand it better before jumping in. Much like a “terms and conditions” contract you might read before signing up for a service, professionally managed funds have a prospectus document outlining key information for investors to read so they can make informed decisions and know what to expect.

In this article, we’ll offer an overview of the fundamentals of a fund prospectus, including what it is and the information it includes. We’ll also explain why they’re important to investors and how to find one for a fund you’re considering investing in.

What Is a Fund Prospectus?

A document that investment companies must file with the U.S. Securities and Exchange Commission (SEC), a fund prospectus includes vital information about a professionally managed fund. The purpose is to inform investors so they can decide whether to invest and, if they’re already a shareholder, stay up to date. Specifically, it provides details such as a fund’s goals and strategies, risks, and past performance.

Prospectus documents are necessary because they shed a comprehensive light on a fund’s operations. By including information upfront about the potential direction of a security and its risks, investors can feel more comfortable deciding to invest or, ultimately, walk away to find other options.

Key Parts of a Prospectus

As noted, a prospectus displays various core information about a fund and how it’s run. As an investor, this allows you to get a more comprehensive understanding of what you can expect from the risk and potential reward standpoint and what kinds of fees and expenses you may incur by investing in a fund. You’ll also get an overview of past performance and information on the fund’s management structure.

Below is a summary of the type of information you should expect to find in a prospectus, according to the SEC:

• Investment objectives. What does the fund intend to accomplish in the future? Specifically, the document should outline whether it aims to appreciate, generate income via interest or dividends, or result in a combination of the two.
• Investment strategies. How will the fund reach its goals? This section should explain the investment techniques it will employ (i.e., following a benchmark, focusing on certain types of assets, etc.).
• Risk factors. What are the potential pitfalls the fund could experience? This section should define the risks and enable you to decide if the fund fits your tolerance.
• Historical performance metrics. How has the fund performed in previous years? This should include charts and tables that can give you an idea of the fund’s trajectory and reactions to market volatility.
• Fees and expenses. This section should include specific details about the expenses you could incur as a shareholder, including expense ratios (annual fees), transaction costs, or sales loads.
• Fund manager information. This will provide information about the management company and, if applicable, the individual portfolio managers who oversee the operations and research of the fund.
• Shareholder information. Finally, you should be able to read information about how it works to be a shareholder, including trading your shares and receiving dividends.

Why It’s Important

Before investing in a mutual fund, ETF, or index fund, it can be hard to know exactly what you’re getting into. This is especially true if you have an average knowledge of the market landscape and, perhaps, only know funds by name or the benchmark they follow (e.g., the S&P 500, Dow Jones, or Nasdaq Composite). In that way, a prospectus plays a crucial role in providing transparency between the fund managers and prospective and current shareholders.

Prospectuses let you learn more about a fund offering and make a more educated decision on investing. Because they include details about past performance, foreseeable risks, and goals, you can, either on your own or with the help of an advisor, decide how a fund aligns with your risk tolerance and holistic financial plans.

It’s important to consider, however, that though prospectus documents contain information you should read and be aware of about a fund, they may be overwhelming if you’re new to investing. While they’re generally digestible for readers, they may leave more questions than answers in some situations. Therefore, it might be wise to consult the expertise of a financial advisor or investment manager who can walk you through the document and share their perspectives on the information.

How to Find a Fund’s Prospectus

There are a few viable avenues to find a prospectus document. One straightforward way is to use the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) search tool, which allows you to search for a ticker symbol, full name, or company. Then, you should be able to find and read the prospectus, along with other related documents and reports.

Another way to find a mutual fund or ETF prospectus is through an offering company’s website. Many companies, such as Charles Schwab, Vanguard, or Fidelity, provide links to important documents — including prospectuses — related to their products. They may list them either directly on the overview page for the product or on a separate listing page for their funds.

For example, on Vanguard’s product page for its Vanguard 500 Index Fund Admiral Shares (VFIAX) fund, the prospectus is accessible via the “fund literature” tab. Similarly, on Fidelity’s page for its Fidelity NASDAQ Composite Index Fund (FNCMX), there is a link near the top to open the prospectus document.

Frequently Asked Questions

How often is a fund prospectus updated?

In general, a mutual fund or ETF will have an updated prospectus at least once a year. For instance, this may include fresh changes to performance metrics, objectives, fees, or managers. An annual release keeps current or potential shareholders in the loop and helps reflect the recent state of the fund.

Can a fund prospectus predict future performance?

While a prospectus may outline what fund managers would like to happen or maybe even expect, it can’t predict future performance. Market volatility, management risk, and various other external factors may impact the trajectory of a fund, making it nearly impossible to predict accurately. In that way, a prospectus is more of a hypothesis than a promise of returns for investors.

Who can answer questions I have about a fund’s prospectus?

If you have questions about a fund’s prospectus while reading, whether you’re already a shareholder or are considering investing, you could try contacting the offering company (i.e., the fund managers) or a financial advisor. The former may field more general clarifying inquiries; however, your advisor or investment professional may be able to answer questions specifically related to you and your holistic portfolio.

An advisor could walk you through the prospectus and help you receive more clarity. They may, for instance, examine the risks and explain how the fund complements the other investments in your portfolio and your general time horizon. On the other hand, while an offering company could clarify information such as fees or dividends, you likely won’t get the same personal touch.

Do you need to read the prospectus?

It’s smart to read a prospectus as much as possible before investing. Doing so gives you a chance to become more informed and have a deeper understanding of what an investment decision in a mutual fund or ETF would look like for you. If you’re unsure, we recommend meeting with a financial advisor to gain further insight into a fund’s prospectus.

To find an advisor, you can use a free matching tool, such as this one. After answering a short set of questions about your goals and circumstances, it will pair you with a professional that suits your needs.