Obtaining a prospectus should be as easy as calling the fund's toll-free number. Examining a mutual fund's prospectus will most likely not be the highlight of your week, however, even if returns are spectacularly high. A prospectus can be dense and wordy, even hard to decipher. The average investor's information needs are not considered in the organization or the wording. Important information is in there somewhere, but it can be hard to find in the midst of the legal jargon. In this highly competitive market, however, some funds are actually trying to soften the legalese in which the fund's prospectus is written. In fact, many now publish easy-to-read newsletters to supplement the information in the prospectus — or at least translate some of it. However you get it done, it's to your advantage to read the prospectus with an eye for specific areas of importance.

The Fund's Objective

The fund should have a clear statement of the objective. Is it aggressive growth? Current income? While it may be clear-cut in bond funds, a fund's objective is not always as obvious when reading the prospectus of a stock fund. If the objective is unclear, the mutual fund manager has more leeway. It also means your intentions in choosing that particular fund may not be carried out. If the fund objective is not clear, you can seek out a fund that is more clearly defined, ask someone in the fund's investment information department, or follow the old rule of thumb and do your homework. Look up the fund's current holdings.

The Investment Risks

The mutual fund prospectus should discuss the level of risks the fund will take in conjunction with its objective. Stock funds should discuss the types of stocks they are buying. Are they talking about speculation? Are they telling you about the volatility of particular stocks? Look at the warnings they're giving you. Are they telling you about the currency and political risks involved with their international holdings?

The prospectus should specify the risks associated with its portfolio. As an investor, you should be aware of the risks of investing and how those risks mesh with your risk tolerance. To make the best possible investment choices, it's important to understand how different investments perform under different economic scenarios. For example, aggressive growth stock funds typically perform best as the market is emerging from a long downward trend. Bond funds, on the other hand, often do well during periods of slow growth, as interest rates fall and bond prices climb. By combining your knowledge with the information in the prospectus, you'll be able to make better, and better-informed, investment choices.

Investment Breakdown

The fund should clearly lay out the percentage of holdings they are committed to in each asset group. The prospectus should state, for example, that the management is required to hold at least 70 percent U.S. bonds, or 80 percent in common stocks, or no more than 20 percent in international investments. The breakdown and parameters of the fund give you an idea where your money will be invested. Other types of investments, such as cash instruments, may also be included.

A fee table should outline all the fees associated with that fund. Read them carefully, and make sure you are left with no surprises. Operating costs, loads, and any other fees should all be included.

Financial History

A prospectus will also give you the history of that mutual fund. The financial information should provide the per-share results for the life of the fund — or at least the past ten years if your fund has been around for a long time. You can use this to gauge the total return of the fund on an annual basis. You can also look at the year-end net asset values, the fund's expense ratio, and any other information that will help you gauge how the fund has performed over time. You can check on dividend payments if it is an income fund, or see the types of holdings the fund has sold and purchased.