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How To Read Mutual Fund Offer Documents

Mutual funds are no doubt, the most sought-after investment vehicles these days owing to their ability to deliver attractive returns which aid investors in the creation of wealth. The distributors or agents or brokers of mutual funds take advantage of this opportunity and convince novice investors to invest in mutual funds. However, in the excitement of the pursuit of wealth creation, many investors tend to overlook some important aspects of investing. One such aspect is, reading the mutual fund offer documents.

To make any kind of investment, the best approach is to take responsibility, research on the various options available, compare, and then make a prudent decision. The same applies to mutual fund investments as well. Instead of relying blindly on your mutual fund broker/agent/distributor, you as an investor should go through the offer documents of the mutual fund scheme you wish to invest in, carefully and then take a decision.

What is a Mutual Fund Offer Document?

A document containing the details of a particular mutual scheme offered by an Asset Management Company (AMC) to the public for investing is known as a mutual fund offer document or a prospectus. This document comprises two parts - the Scheme Information Document (SID) and the Statement of Additional Information (SAI).

The Scheme Information Document consists of important information regarding the scheme such as the investment objective, the pattern of asset allocation, risk involved, investment approach, fund manager, benchmark index, fees and expenses, etc. The Statement of Additional Information, on the other hand, carries all statutory information of the mutual fund house.

The preparation of both the SID and SAI are done in the format prescribed by the Securities and Exchange Board of India (SEBI) and they have to be submitted to SEBI. The fund house can also include any disclosures that it feels is necessary for the investor.

How to read the mutual fund offer documents?

Since the SID contains important details of the scheme, it is imperative to go through it thoroughly. While doing so, ensure that you read the below-mentioned points in the SID:

  • Investment objective - This section explains the intent behind the launch of a scheme and how it will be achieved. The investment objective clarifies the doubt investors may have concerning the names of the schemes. For instance, ‘Capital Protection Oriented Funds’ may not guarantee protection of capital and hence, the investment objective clears such ambiguities.
  • Asset Allocation - This section indicates how the scheme will allot its assets to the relevant asset classes (such as debt, equity, and gold) under usual market conditions. The pattern of asset allocation indicates the range of the maximum and minimum exposure to the various asset classes. Investors can judge if a scheme is debt-oriented, equity-oriented, commodity-oriented, etc., from the asset allocation and give them an idea whether the scheme fits their investment requirements or not.
  • Investment strategy - This section explains the approach or style the fund house will follow while choosing the securities to invest in. This is vital because the investment strategy is a reflection of the systems and processes the fund house follows. Fund houses with a clear investment strategy impart a sense of confidence in the minds of investors.
  • Benchmark of the scheme - A benchmark is chosen for a particular mutual fund scheme so as to structure the scheme according to the constituents of the benchmark.
  • Risk factors - Mutual funds carry certain risks with them which can hamper the valuation of the investments. Investors should be aware of the various types of risks that the scheme carries so that they can evaluate if they can tolerate the risks for the achievement of capital appreciation.
  • Fund manager - The expertise of the fund manager is crucial for the scheme’s overall performance in the long run. A few of the qualities that you should look for in the fund manager are the experience, qualification, track record, etc. This information can be found highlighted in the SID.
  • Past performance - Though the past performance of a fund cannot guarantee its future performance, it can be used to guide your investment decision. The SID of an existing mutual fund scheme will bear the scheme’s past performance over different time frames. This information can be used to assess if the track record clocked by a particular fund fulfils the investment objective of the fund.
  • Fees and expenses - The expenses charged by the AMC are directly proportional to the net returns delivered by a particular scheme. In the process of fetching optimal returns for the investor, the AMC will levy charges in the form of loads, fund management fees, switching charges, etc. These charges are deducted from the NAV of the scheme and hence, as an investor you should look for a scheme that has a lower expense ratio which would translate to you achieving higher capital gains.
  • Investment options - Most mutual fund schemes offer 2 options of investment - growth and dividend. The dividend option further offers a payout and reinvestment option. Also, there are various modes of investing such as the SIP (Systematic Investment Plan), lump-sum investment, and STP (Systematic Transfer Plan). Remember to read through the SID to look for these options so that you can make an informed decision based on your investment needs.

These are some of the important aspects of a mutual fund scheme that will be mentioned in the SID and which you need to look out for. Reading the SID thoroughly will help you judge the credibility of the AMC and the scheme in which you are planning to invest your hard-earned money on.

What is a Key Information Memorandum?

A KIM or Key Information Memorandum is the condensed form of the SID and contains the essential components of the offer document. The KIM contains the following information:

  • Details of the AMC and the scheme such as the mutual fund’s name, its AMC and Trustees, etc.
  • Details of the scheme such as the inception date, issue date, investment objective, risk profile, name of the fund manager, benchmark index, etc.
  • Options and plans offered by the scheme
  • Minimum investment details
  • Scheme’s past performance over various time frames
  • Loads and recurring expenses
  • Contact details of RTA (Registrar and Transfer Agent)
  • Comparison with other existing schemes

Conclusion:

Mutual fund offer documents, as stated above, can help you gauge the credibility of a scheme and the AMC. It can be used as a guide to making a prudent investment decision and aid you in wealth creation.

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