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How to Read A Prospectus

The Securities and Exchange Commission (SEC) requires every mutual fund company to provide investors with a copy of the most current prospectus prior to – or in conjunction with – the purchase of mutual fund shares.

A prospectus contains valuable information, including the fund's investment objective, investment strategy, investment risks, performance history, and fees and expenses.

Investment Objective: describes the fund's investment goal, such as long-term growth of capital or current income. By reading this description, you should be able to determine if the fund's objective coincides with yours.

Investment Strategy: describes how the fund manager intends to invest the fund's assets to achieve its investment objective. You should pay special attention to the types of securities – large company stocks, small company stocks, corporate bonds, government bonds – the fund is allowed to invest in to ensure that the level of risk associated with such securities coincides with your own risk tolerance level.

Investment Risks: describes the specific risks associated with an investment in the fund. For example, in a bond fund, such risks might include credit risk, which is the possibility that an issuer cannot make timely interest and principal payments. To help minimize this risk, you may want to choose a fund that invests in bonds rated investment-grade or higher. For an equity fund, such risks might include market risk, which is the possibility that the value of your portfolio will decline because of a drop in one or more sectors of the stock market. To help minimize this risk, you may want to choose a fund that invests in a broadly diversified portfolio of stocks to ensure that your investment performance isn't tied to one market sector.

Performance History: while past performance does not guarantee future results, it will show you how the fund has performed over time, which may give you a better idea of how the fund may perform under various market conditions. Where applicable, the prospectus is required to state the fund's standardized one-, five and 10-year (or since inception) average annual returns.

In addition, the prospectus contains information on:

  • Purchasing and redeeming shares
  • Fees and expenses
  • Dividends and capital gains distributions
  • Check-writing and other shareholder services

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