Mutual fund prospectus primer

Read the investment policy

In describing its investment policy, a mutual fund's prospectus will lay out the parameters in which fund managers will choose investments.

"Some companies will say, 'We can't have more than 50 percent in junk bonds,' or '50 percent is going to be in U.S. treasuries,'" Place says. "Some funds will be able to invest in just about anything."

An aggressive fund manager may have wide latitude in picking companies for the fund. For example, Saulnier recalls one real estate fund manager who expanded the definition of that category to include mining and coal companies -- both part of "the land," the manager reasoned. But some investors may have been surprised to learn that's what they were getting into. "Make sure you're comfortable with what the fund has the capability of doing," Saulnier says.

Check out fund management

The prospectus will tell you who manages the portfolio and how long the manager has been on the job. Some funds are managed by one person, others by a group.

"There is a certain strength to the group approach," Saulnier says. "The problem with an individual manager ... is that when that person leaves, it blows out the entire fund potential."

With a group of managers, even if one "star" manager leaves, the others can still maintain the continuity of the investment strategy.

As far as experience is concerned, Mecca says the more, the better. "I want someone who's been through it, has seen it and knows how to react to it," he says. "Somebody who just gets out of school and has one to two years of experience, that's a negative to me."

On the other hand, Randy Kurtz, chief investment officer at RK Investment Advisors in New York, says a little freshness isn't necessarily a bad thing.

"There are two ways of looking at that," Kurtz says. "Experience is always good ... yet there have been studies that say that, on average, managers' best performances are early in their (careers)."

It's essential to know how long the manager or group of managers has been at a fund in relation to the period of performance you're evaluating.

"You need to make sure that the performance you're looking at is attributable to the people who are currently managing the fund," Kurtz says. "If they've only been on the fund for two years, you can't look at the five-year track record."


Note fees and expenses

The fund and its managers look like a good fit for your investment goals. Now you want to check out the price tag. A host of transaction fees and operating expenses may apply.

Shareholder fees are charged directly to the investor when a transaction is made. They may include sales loads -- compensation for brokers who sell funds, paid either when shares are purchased (front-end) or when they are redeemed (back-end); redemption fees -- paid to the fund as opposed to the broker to defray costs the fund incurs when you redeem shares; exchange fees -- charged when you transfer shares to another fund within the same fund group; account fees -- charged to maintain accounts valued below a certain amount; and purchase fees -- charged to defray costs associated with the purchase of shares.

          Connect with us

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

Start retirement savings at 24?

Dear Dr. Don, At age 24, I recently started a job working for a corporation. I'm interested in individual retirement accounts. I'd like to look at investing in stocks and bonds and learn more about choosing a 401(k) plan.... Read more



Jean Chatzky

Jean Chatzky: Bad month for the market?

How should you react to headlines that tell you a crash is imminent?  ... Read more

Partner Center

Connect with us