Guide To Offer Document of Mutual Fund

Do you know what differentiates a good investor from the others? Its knowledge and awareness. Of course, the expectation is not to have each and every piece of information. However, a basic understanding and knowledge of mutual funds is essential for investors.   Mutual fund investors get away without knowing much about their funds, as they trust the fund manager to take care of the finer details of investments. However, at the very least, they should read the offer document before signing on the dotted line.

A mutual fund offer document is a document containing the details of a particular mutual scheme offered by an Asset Management Company (AMC) to the public for investing. This document comprises two parts:

• The Scheme Information Document (SID) 
• 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, the risk involved, the investment approach, the fund manager, the 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 SID and SAI preparation is done in the format mandated by the Securities and Exchange Board of India (SEBI) and must be submitted to SEBI. The fund house can also include any disclosures necessary for the investor.

All mutual fund distributors and financial planners must give their clients a copy of the fund offer document before the investor signs the application form. As these documents are exceedingly lengthy and almost identical, you may want to go through the fund's Key Information Memorandum (KIM) for an overview of the key terms of your investment.

How Do You Read the Mutual Fund Offer Documents?

Since the SID contains important scheme details, it is imperative to review it thoroughly. While doing so, ensure that you read the below-mentioned points in the SID. Here are some of the things that you must know:

1. Investment objective: This section explains the intent behind the launch of a scheme and how it will be achieved. Hence, this part explains the mandate and scope of the fund's investment. Whether the fund is equity- or debt-oriented, whether the fund will be multi-cap, large-cap, mid or small-cap specific, the level of diversification, the option for the fund manager to invest overseas, and other such information will be mentioned here.
2. Type of fund: Is the fund open or close-ended? In the case of a close-ended fund, you should look at the lock-in period, liquidity window and repurchase options.
3. Costs: Fees, expenses and loads will be listed. Compare these factors with those of other similar funds.
4. Investment: The minimum initial investment, methods of purchasing, redeeming and making additional investments, the amount of time required for redemption, and so on.
5. Investment team: The fund manager's expertise is crucial for the scheme's overall performance in the long run. A few qualities you should look for in the fund manager are experience, qualification, track record, etc. This information can be found highlighted in the SID. The fund manager, the number of fund managers in the fund and information about each one of them. This information is useful to those who want to check the performance of funds previously managed by the same team members.
6. 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 asset allocation pattern indicates the various asset classes' maximum and minimum exposure ranges. Investors can judge if a scheme is debt-oriented, equity-oriented, commodity-oriented, etc., from the asset allocation, which gives them an idea of whether the scheme fits their investment requirements.
7. 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 reflects the systems and processes the fund house follows. Fund houses with a clear investment strategy impart a sense of confidence in investors' minds.
8. Benchmark of the scheme: A benchmark is chosen for a particular mutual fund scheme to compare the performance of the fund. In the case of passive funds, it helps to structure the scheme according to the benchmark's components.
9. 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 to evaluate if they can tolerate the risks to achieve capital appreciation.
10. Past performance: Though a fund's past performance 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 fund's investment objective.
11. 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 into you achieving higher capital gains.
12. Investment options: Most mutual fund schemes offer 2 investment options - 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 on which you plan to invest your hard-earned money.

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 include the inception date, issue date, investment objective, risk profile, fund manager name, 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

What Is a Mutual Fund Fact Sheet?

As an investor, you should always know where your Mutual Fund is investing your money in, which stocks and sectors were added and removed after you invested in the fund, who the fund manager is, how they performed in the past, etc. 

As an aware investor, you should have answers to the above questions before deciding to invest in a particular fund. Here comes the fund factsheet. It is a vital source of information, figures, facts, disclosures, and terminologies that you should be aware of regarding the fund you want to invest in. Mutual fund fact sheets are available every month.

Mutual Fund Fact Sheet Components

Various components are there in a mutual fund factsheet. However, apart from the basic fund information and details about the fund managers, other prominent components are:

Portfolio composition and characteristics

A Mutual Fund is a basket of different assets or, in other words, a well-diversified portfolio. Portfolio composition is one of the most important tools for analysis. As an investor, you will get to know exactly where the money is being invested, the proportion of investments, and what amount is cash. It helps in the understanding of: 

Asset Allocation:

Provides a detailed break up of the assets, which includes debt investments, stock holdings, cash and other assets,

Equity Holdings:

This section lists the Top ten Holdings according to their percentage weight in the Scheme.

Company and Sectoral Allocation:

The allocation of companies and sectors reveals the level of concentration based on percentage values. Information about concentration across industries and businesses is essential from the diversification and risk mitigation perspective.

Portfolio Performance Analysis:

The Fact sheet also provides historical performance data for different time periods like since inception, 15/10/5/3 years, and 1 year. This is depicted to compare:

SIP Returns
Scheme Returns
Market’s Overall Returns
Returns again the Benchmark

It also lets you take a better view and make informed decisions. It is important to remember that past performance does not guarantee future performance. 

Key Ratios

The fund fact sheet contains certain risk-return measures that should be considered for analysing a fund. However, ratios should not be considered in isolation. Rather, a consolidated view should be the guiding force. Examples of ratios are the Sharpe ratio, Sortino ratio, Beta, etc.

Conclusion

Mutual funds are undoubtedly the most sought-after investment vehicles these days owing to their ability to deliver attractive returns, which help investors create wealth. Mutual fund distributors, agents or brokers take advantage of this opportunity to convince novice investors to invest in mutual funds. However, in the excitement of pursuing wealth creation, many investors overlook some important aspects of investing. One such aspect is reading the mutual fund offer documents.

To make any investment, the best approach is to take responsibility, research the options available, compare, and then make a careful and 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 plan to invest in carefully and then decide.

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.