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What to Look For In a Fund Prospectus

There is an abundance of fine print, and odd terminology in a prospectus, so knowing what to look for is essential to being able to weed the good investments out from the great investments. When you find a fund that interests you, contact either the mutual fund company or your financial adviser and request a prospectus for the fund of interest. The prospectus will list a variety of essential items such as: the fund's advisers, restrictions, fees and goals. Along with the prospectus you should receive an annual report representing the mutual fund company. This will provide an insiders view of the fund's assets as well as previous years performance.

Do not simply skim through the prospectus as this could very well define future performance expectations. There are three essential sections of the prospectus that should be reviewed before investing. The first section that should be reviewed is the fund's investment policies and can be found in the section titled "Key Features of the Fund." This section will describe what investment objectives the fund is best equipped for.

Next you should review the types of transactions the funds typically executes as well as the securities typically bought and sold by the fund. This will give a clear picture of the fund's financial direction. Lastly, be sure to carefully read the section regarding fees and costs associated with purchasing and holding shares of the fund, otherwise known as loads. This is found in the section titled "Summary of Expenses" and contains a broken down cost structure by fee type. Sales load and or charges must be clearly explained and detailed in this section.

When you become an investor of the fund you should continually review semiannual reports of each fund you own. If you review what sectors the fund is currently investing in, you will be better prepared to correlate the fund's performance to an industry's performance. For example, if 27% of the fund's portfolio is in chemicals, you will better understand why the fund performed poorly if chemical stocks in general performed poorly. When you understand how the two correlate with each other, you will be less likely to sell in a panic.

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