A prospectus is a document offered to potential investors to describe a given investment. Prospectuses are most commonly received by individuals being solicited for the purchase of mutual funds or other securities.
All funds have an investment objective. Some funds seek capital growth, others income, others stability of principle. In this section, the fund manager or solicitor must disclose the purpose of the investment and how it is desired to perform.
Related to the investment's objective is it's risk profile. Different investments are subject to different types and ammounts or risk. In this section of the prospectus, the fund company must disclose what risks are present. Examples include liquidity risk, market risk, timing risk, interest rate risk, currency risk and more.
Prospectuses will always show the past performance of a given investment assuming it is not an initial public offering (IPO). While not guaranteed, the average of all past returns is the expected future return for all financial calculations.
Every fund must disclose a number of items. All funds must disclose who is running the fund and what their credentials are. Funds must also disclose that past performance is no guarantee of future results.
Fees and Expenses
The last major section of a prospectus describes the fee structure of the investment. Virtually every investment has an ongoing fee expressed as a percentage of the annual assets under management. Most funds will also have distributor and solicitor fees, known as loads. Some loads are applied at purchase, some ongoing and others at redemption. All loads and fees and methods of reducing them must be disclosed.