Reading a prospectus | American Funds

  • Help
  • RETIREMENT PLANNING
  • MUTUAL FUND BASICS
  • ROLLOVERS
  • CALCULATORS & LEARNING TOOLS
  • FUND INFORMATION
  • ABOUT AMERICAN FUNDS

Learning tools

Reading a prospectus

Before investing in any mutual fund, be sure to read the prospectus or summary prospectus. A prospectus is a legal document that explains the investment objectives, operating policies, charges and historical results of the fund. A summary prospectus is a condensed version of the prospectus. If your plan is a group annuity, contact your employer or financial professional to obtain additional information about your plan’s investments. Here are some important things to look for and why:

Date

Prospectuses are generally updated at least once a year. Make sure you have the most recent version.

Objective

Make sure the fund’s investment goal matches your own. For example, if you’re saving for retirement, you may be looking for long-term growth.

Risks

Every investment carries a certain amount of risk. The funds are not guaranteed and you could lose money. Is the risk described in the prospectus acceptable to you?

Investment results

This describes the fund’s returns over time. Even if you like what you see, remember that there is no guarantee you’ll get similar results in the future.

Fees/costs

This section lists expenses associated with the fund, expressed as a percentage of the fund’s net assets. The prospectus will also give you an illustration that shows how much the fund’s operating expenses would reduce your return on a $10,000 investment at a hypothetical rate of return over different periods. You can use this information to compare the cost of investing in a particular fund with the costs of similar funds.

Types of expenses

Commissions

 

 

If the fund is sold through a broker or financial professional, you may pay a sales charge, called a load. Sales charges can be paid up front (when you buy Class A shares) or paid on a contingent deferred basis if you leave the fund before a specified period of time (if you own Class C shares). If you stay in the fund, you pay no sales charge, but annual expenses are higher. No-load funds are mutual funds sold without a sales charge, but generally you will not benefit from the expertise of a financial professional.

 

Management fees

All funds charge this annual fee, which is used to pay the investment adviser(s) for managing the portfolio.

Distribution fees 

These are also called 12b-1 fees. They cover marketing and distribution expenses.

Redemption fees

These charges are designed to encourage long-term investing and to discourage you from selling your shares after only a short period of time. If you’re investing for retirement, which means you’re looking at the long term, you probably won’t have to deal with redemption fees.

Reinvestment fees

One way to help your investment grow is to reinvest any distributions you receive from it, if such an option is available. If it is and you reinvest the money, you may have to pay a fee. American Funds does not charge a fee for reinvestment of distributions. Note that in retirement plans, capital gains, distributions and dividends are automatically reinvested.

Exchange Fees

 

You may have to pay exchange fees if you move your money from one fund to another in the same mutual fund company.

Other expenses

These include expenses such as transfer agent fees, custodian fees and legal fees.

A useful tool

When comparing similar mutual funds, one of the most important numbers to look for is the expense ratio. This represents the fund’s operating expenses as a percentage of its total assets. Since expenses reduce your overall return, look for low expense ratios.

The prospectus also contains information about the fund’s investment adviser and portfolio managers.

It’s smart to learn as much as you can about your investment choices before you decide on a fund. Your employer can tell you which funds, share class and options are available in your plan. The fund overviews and share prices and returns pages can help you make your selections.

 

 Return to top

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional or downloaded and should be read carefully before investing. This information may vary regarding group annuity investments and, if applicable, can be obtained from a financial professional.