A mutual fund prospectus contains important information about how effectively the fund invests and how well it serves its investors. However, this information changes throughout an investment year. Because investors need current information, the Securities and Exchange Commission requires mutual funds to update their prospectuses at least once a year. You can skim a new prospectus to find the vital changes that can affect your investment decisions.
Each year, a mutual fund must update its past performance. This update usually comes with a disclaimer that says past performance does not indicate what the fund will do in the future. Still, you can see what the fund did for the previous year and for all of the years it has existed. This gives you some idea of how well the fund's investment strategy has worked. The most recent prospectus will include the previous year's gains or losses. This can let you know how you would have fared if you had put your money in the fund a year ago.
Objectives and Goals
Each mutual fund has its own strategy, and a prospectus states the fund's goals. For example, the fund may invest to achieve the highest possible income from dividends and interest. A fund might also choose to buy stocks with strong growth potential, even if they don't pay dividends. While it is unlikely for a fund's primary objectives to change, the annual update of the prospectus could reveal that management has decided to invest temporarily in something it normally doesn't. Don't assume the fund always sticks with investments that are part of its stated objective.
If you choose your mutual fund based on the way it avoids risk, check the prospectus each year. The fund might take on more risk than you thought it would. For example, if you choose a bond fund that only invests in government bonds, a revised prospectus could reveal the fund has bought some corporate bonds it considers relatively safe. You can decide if you agree with that move.
When you invest in a mutual fund because it has the bulk of its money in one stock, bond or real estate holding, you may have an expectation that any changes in holdings will only occur with investments outside of that core. This may not be true. A revised prospectus will tell you if the fund has sold a major holding. This could change your opinion of the suitability of the fund for your investment goals.
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