Introduction

The prospectus is a document provided by a mutual fund company to give potential investors a detailed road map of a fund - covering everything from its objective and fees to its portfolio holdings and its manager.

The prospectus is designed to help you evaluate a fund, including the programs and policies its management uses to achieve its investment goals and the costs of investing in the fund. In fact, by law, the fund must send you a prospectus before you invest.

Fees

Some of the money you invest in a fund goes to pay various expenses.

A summary of fees and expenses usually appears near the beginning of the prospectus. The fees can range anywhere from a low of .5 percent of assets up to 8.5 percent. Traditionally, no-load bond funds and index funds are at the bottom end of the fee range, and international equity load funds are at the top.

Specific Fees

Some funds charge only a management fee, while others tack on a variety of other charges. Here are some examples:

Management fees are annual charges to administer the fund. All funds charge them, though they vary from less than 1 percent to more than 2 percent of the fund's value.

Distribution fees (called 12b-1 fees) cover marketing and advertising expenses, and sometimes are used to pay bonuses to employees. About half of all funds charge them.

Redemption fees may be assessed when shares are sold, to discourage frequent trading. They're also known as back-end loads.

A deferred sales load, a kind of exit fee, often applies only during a specific period - say, the first five years - and then disappears.

Reinvestment fees may apply when distributions are reinvested in a fund.

Exchange fees may apply when money is shifted from one fund to another within the same mutual fund company.

The Problem With Fees

The bottom line is that fees reduce your earnings.

If the total return on a fund is reported as 8 percent, but you're paying 3 percent in combined fees, your actual return is reduced to 5 percent. And because fees aren't included in total return calculations, you have to figure out for yourself what investing in a specific fund actually costs you.

Turnover

When a mutual fund buys and sells stocks and bonds within its portfolio, it pays commissions the same way you do.

All open-end mutual funds trade stocks and bonds regularly - some more regularly than others. A fund's portfolio turnover rate reveals how much buying and selling is going on. In general, frequent turnover means higher stockbroker expenses, which means the fund needs higher returns to offset the cost.

The range of turnover rates is enormous, sometimes reaching as high as 100 percent annually. There's no rule that says whether trading frequently or infrequently works better, since both styles can produce high-performance funds.

Opening an Account

When you ask for a fund's prospectus, the fund company will probably send you an application as well.

Opening an account is easy, whether you deal directly with the mutual fund or invest through a broker or other financial advisor. All you do is fill out the application and write a check.

Most funds require minimum investments, often $1,000 to $2,500. In most cases, a higher amount is required for opening an account than for adding to it. Usually you can make additional investments of as little as $100 at a time, as frequently or infrequently as you like.

Investment Methods

Most funds make it easy for you to make additional investments once you've opened your account. After all, it's probably in the fund company's interest for you to increase the amount you're investing with them.

Most funds let you invest by mail, through a broker, or with automatic direct deposit from your bank account. In fact, if you agree to an automatic investment plan, the amount you must invest each time may be reduced to as little as $50.

Redemption and Reinvestment

When it comes to the money you earn on your fund, you can take it or leave it.

You can reinvest the money you earn by having your distributions put back into the fund.

Or you can take the money in cash, or some combination of the two. If you're investing in mutual funds for long-term growth, you'll probably decide to reinvest.

The earnings are taxable, whether or not you get the cash, unless you're investing in a tax-exempt fund. The fund company will let you know what the earnings were at the end of each year.

Check Writing

Some funds do double duty as checking accounts.

Sometimes you write checks against the value of your accounts, as if it were a bank checking account. Each check may have to be for at least a minimum amount - often $500 - but you can use the checks to pay your bills, make investments, or whatever you like. Money market funds, however, are the only ones you should use this way. Redeeming stock and bond funds by check always has tax consequences since there will be a profit or loss on the investment.

Other Fund Features

Most mutual funds are easy to deal with, often letting you do business over the phone.

As long as you sign up for the various features when you open your fund account, moving money around or taking it out is easy.

Exchange services let you transfer money from one fund to another, as long as the same name or names are on the two accounts. And there are lots of ways to get your money out of the fund, including checks, wire transfers, electronic transfers, and automatic withdrawal plans.

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