Is It Worth 10 Minutes to Be Able to Decipher That Prospectus?

Later this summer, mutual fund companies will begin issuing two-page fund profiles designed to boil down the more traditional unwieldy, unreadable (and often unread) prospectus.

But why wait? Mutual fund attorney Michael Radmer has figured out how investors can reduce their own prospectus reading to a 10-minute quick scan.

Following his advice, you can take an ordinary prospectus, hunt for key sections and key words, skip the really boring parts and get a pretty good picture of the fund you’re examining.

Here’s how to do the 10-minute prospectus.

* Skim the section detailing “investment objectives and policies.” Do they match the objectives you have for the fund? If you are saving for a long way off retirement, the fund should aim at long-term growth. If you need significant income now, and you’d like it tax deferred, make sure the fund’s objectives reflect those goals.

* Read about “risks” with certain buzzwords in mind. You may not see the word derivatives, but if you see inverse floating rate obligations or interest only or principal only obligations, that’s what you are buying.

You can avoid them altogether if you want to steer clear of exotic, risk-heightening securities, but be aware that some fund managers use these investments as hedging tools that may lessen your risks. If you want to know more, read the section that details allowable investments to see how your fund manager will use these securities. And keep those “io’s” and “po’s” to less than 20% of the portfolio.

* Look for hidden tax burdens. Unless you are putting the fund in a tax-deferred retirement account, you’ll want to see what kind of tax bite you are buying.

“Unrealized appreciation” means capital gains waiting to be taxed; capital loss carry forwards could cut your tax burden this year. A fund that buys and sells a lot during the year can be expected to generate significant capital gains income every year too.

If you’re looking for a tax-free investment, check the prospectus’s table of tax equivalent yields. It will tell you how much return you need from a taxable fund to beat the fund’s tax-free return.

* International investors should check for portfolio concentrations and currency policies. Check in the policies and risk section to see if the fund has limits on how much of its portfolio can be invested in one country, or region. Check there, too, to see if the fund manager tends to hedge currency positions. That can make the fund more stable but ultimately cost some return.

* Research the bottom line. Fund expenses are detailed in the first pages of the prospectus. Don’t just look for initial sales charges or loads. High, ongoing operating expenses or so-called 12(b)1 fees for marketing the funds can end up costing more on a long-term investment. It’s especially hard to make up high expenses on an income-oriented fund, notes Radmer.

* Find the manager and rate his or her performance. Has he or she been with the fund for at least a year, or compiled a decent performance record on a similar fund? Compare the fund’s performance with a comparable unmanaged index, like the Standard & Poor’s 500.

* Seek special features. As funds grow in number, the services they offer become more important and competitive. Do you want telephone transactions, check writing, automatic investing? Ensure that the fund’s investment minimums are within your reach.