Mutual fund companies or brokerages that sell mutual funds are required by law to send out a prospectus to their clients. A prospectus contains a lot of information for the investor, such as the fund’s investment objective, strategies, holdings, information on the manager, risks, past performance, benchmark information, fees and minimum investment amounts.

Let’s go over some of the key tenets of the prospectus.

There are two types of prospectuses: the standard, which can range from 50 to 200 pages, and the summary prospectus, which is an abridged version that ranges from five to 20 pages. Investors should always review prospectuses prior to investing in any mutual fund to ensure that they are well aware of the investment strategies involved, risks associated with those strategies, fees and other very important information.

For the purposes of this article, we will use the prospectus for the American Funds Growth Fund of America, which can be found here. It can be found through the fund family’s website at American Funds and covers all of its share classes, including the A, B, C, F series (e.g., F1), 529 series (e.g., 529A) and R series (e.g., R1) shares.

The investment objective is usually one of the first topics covered in the prospectus, so the shareholder immediately knows the main goal of the fund.

For instance, the Growth Fund of America’s objective is to provide its shareholders with growth of capital. However, depending on the fund, this could include preservation of capital, growth and income, or aggressive growth.

This is the second most important part of the prospectus, as each share class has a different sales load and expense ratio.

For example, the A and 529-A shares’ upfront load for the Growth Fund is 5.75% with a maximum deferred sales charge of 1.00%. The prospectus fee section also breaks down the fund’s expense ratio. The Growth Fund A share, for instance, has a management fee of 0.27%, a distribution (12b-a) fee of 0.24% and other expenses of 0.13%. This would have an annual fund operating expense of 0.64%.

For more information on mutual fund share classes, click here.

Another useful section for investors is the example that American Funds provides when $10,000 is invested in each of the different share classes. Using the A share again, a shareholder would pay $637 after one year, $768 after three years, $911 after five years and $1,327 after ten years. Over the ten-year period, the most inexpensive share class for the Growth Fund is the F-3 share at $418. However, this is the institutional class and cannot be typically purchased without investing a very large amount.

Later on in the prospectus, one can find more in-depth coverage of sales charges, sales charge reductions and waivers, and how to choose the right share class.

The next section discusses the strategy of the fund and the investment philosophy of the management team.

For instance, the Growth Fund invests in stocks that offer “superior opportunities for growth of capital.” This section also states the fund will primarily invest in large and mid-capitalization companies, as well as up to 25% of stocks that are outside the United States. The Growth Fund also uses a system of multiple portfolio managers, which is divided into segments. This way, the manager believes that the fund will best achieve its goals using the best-performing segments.

This section is important for investors because it makes them fully aware of all the risks associated with the fund.

For example, the Growth Fund identifies five specific risks. Market conditions are the first risk, which are due to the fund’s investment in stocks. Issuer risk is another risk where the issuer of a current holding could cause the investment value to decline due to a deterioration of rating or other negative aspects. The Growth Fund also has risks of investing in both growth and international stocks. Finally, the last stated risk is management risk where the investment could lose value if the fund’s management changes or could change methods of analysis.

To measure the risk of a mutual fund, read this article.

In the past performance section, American Funds displays the calendar year returns for the A share back to 2007. In this graph, it also shows the highest and lowest quarterly returns during this period.

Along with the calendar year returns, a fund issuer like American Funds could also display 1-year, 5-year, 10-year and lifetime average annual returns, broken down by each share class. To provide a more realistic comparison, the returns are usually compared to the returns generated by a market benchmark, such as the S&P 500.

A quick summary of the investment advisor is often provided, followed by a detailed list of team members and portfolio managers with discussions of their prior experiences.

For instance, the prospectus for the Growth Fund of America covers the fund’s management section in two areas. The first is a quick summary of the investment advisor, which is called the Capital Research and Management Company. It also lists the 12 team members and provides their portfolio management experience. Later on in the prospectus, there is much more detailed information on the investment advisor and each individual team member.

Want to know what a mutual fund manager does exactly? Read this.

This is another important section for the investor because it discusses the minimum account and subsequent purchase size for the funds.

For example, the minimum account size for the fund is $250 with minimum subsequent purchases of $50. This section also includes contact information if an investor wants to sell shares it owns that are held directly at American Funds.

For an investor looking to compare how a mutual fund fared against his or her set benchmarks, there is a separate section in the prospectus.

For American Funds, there is the ‘Additional investment results’ section that compares the A share average annual total returns against several benchmarks for comparative purposes. It shows five indices, such as the S&P 500, Lipper Large-Cap Growth Funds Index, Lipper Growth Funds Index, Lipper Large-Cap Core Funds Index and Lipper Capital Appreciation Funds Index. Like the past performance section of the prospectus, this table displays the returns in the one year, five year, ten year and lifetime time frames.

A useful resource to compare index funds against actively managed funds is the Index Fund Center.

The rest of the prospectus covers many more bits of information that the investor might need to know before he or she considers purchasing the mutual fund.

It covers topics like distributions, taxes, rollovers from retirement plans and financial highlights. Distributions discuss the issuance of capital gains in December, which is common with almost every mutual fund. The tax portion covers the taxation of both the short-term and long-term ramifications of capital gains distributions and transactions. The rollovers from retirement plan section cover the different circumstances when an investor is looking to roll his or her mutual fund in an employer-sponsored plan into an IRA. Finally, the financial highlights section is intended to further help investors understand the fund’s results for the past five years, displaying a variety of tables.

Mutual fund prospectuses can be found in a variety of places. If an investor is interested in purchasing one, he or she will be issued one before or during the purchase. The broker/dealer or financial institution that places the mutual fund trade can also provide the prospectus to the investor. Prospectuses can also be found on the fund family’s website or through the SEC EDGAR database.

All investors should review mutual fund prospectuses before deciding to purchase a mutual fund to make sure that they are well-informed of the fund’s fees, risks and other very important factors and ensure that they align with their investment goals.

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