As an investor, what should you look into an offer document (OD)?


Mutual funds file a document under the Securities and Exchange Board of India

This document contains important information regarding the schemes' investment objective

When you see the advertisement ‘Mutual funds sahi hai!’ you also see this standard disclaimer, “Mutual Fund Investments are subject to market risk. Please read the offer document carefully before investing.”

Yes, it’s true and in fact, all security market investments, including bank deposits, are subject to some risks. However, it should be a calculative risk that is measurable and bearable as per the risk appetite or risk tolerance of an investor. These days, mutual funds are the most demanding investment vehicles for wealth creation as they generate attractive returns, but as an investor, the best approach will be to take a good look at the offer document first.

What is a Mutual Fund Offer Document?

Mutual funds file a document under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 at the time of launching any scheme, known as a standard scheme offer document or offer document. The scheme offer document provides essential information about the scheme to help investors in making informed decisions about whether they will purchase the units being offered. The offer document is an integral part of the investment decision. Therefore investors must read documents before investing.

This Offer document consists of two parts: Scheme Information Document (SID) and Statement of Additional Information (SAI).

  1. Scheme Information Document (SID): This document contains important information regarding the schemes’ investment objective, asset allocation pattern, investment policies, the risk involved, benchmarks, and details about fund manager, fees & expenses to help an investor for making an informed investment decision.
  2. Statement of Additional Information (SAI):This contains all the statutory information of the Mutual Fund house.

Please note that the format prescribed by SEBI has to be maintained. Investors can obtain these documents from the fund house directly, through mail or e-mail or from advisors. Fund houses also upload copies of ODs on their websites.

What is Key Information Memorandum, and how does it help investors?

The Key Information Memorandum or KIM is the summary of SID that has made investors’ job more manageable. It is an abridged form of the scheme information document that mentions the key sections of the offer document serving the cause of investors. This document sets forth the information a prospective investor should know before investing. KIM is a standard format prescribed by the market regulator SEBI.

As an investor, what should you look into an offer document (OD)?

Date of issue of OD

Check the date of the issue on the OD to confirm that you have received the latest edition. An OD must be updated at least once a year.

Minimum Investments

As an investor, you should know the minimum initial investment required and the minimum investment needed for subsequent investments.

Investment Objective

The investment objective explains the goal behind launching a particular mutual fund scheme and how it will be achieved. The investment objective clears the doubts investors may have concerning the names of the schemes. So before investing, make sure that the fund’s aim matches your target.

Asset Allocation

The asset allocation means the allocation of the mutual fund scheme to various asset classes. The pattern indicates a range of minimum and maximum exposure to the respective asset classes as no fixed percentage has been mandated for the same.

From this, you can easily judge whether the mutual fund scheme is equity-oriented, debt-oriented, or is a hybrid scheme and that it fits your requirements.

Investment Strategies

The investment strategy is the processes and systems that a fund house follows as a whole while selecting the instruments (equity, debt, or gold) for investment. Fund houses with a clear investment strategy generate a sense of confidence in the minds of investors.

Benchmark of the Scheme

The fund selects a benchmark to structure the scheme according to the constituents of the benchmark and as well as to compare its relative performance. Therefore it is essential to know.

Risk Factors

Offer documents give descriptions of the risks associated with investments in the fund. There are varied types of risks like liquidity risk, default risk, settlement risk, interest rate risk, reinvestment risk, economic risk, currency risk, political risk, and the investor should know the risk involved and evaluate whether he can take such risks.

Past Performance

The past performance of a fund cannot always guarantee its future performance, but it helps the investor to make an investment decision. The SID contains the past performance of the scheme over different time frames. This track record helps assess whether a particular fund can fulfill its investment objective.

Fees and Expenses

The charges that AMC will deduct from the NAV of the scheme, such as loads, fund management fees, switching charges, etc. are mentioned in this section. As an investor, you should look for a scheme with a lower expense ratio, which would give higher capital gains.

Fund Manager

The overall performance of a scheme, in the long run, depends on the expertise of the fund manager. Information related to the fund manager, like the qualification, work experience, a track record of the fund managed by him, can be found in the OD. This information gives an idea of the pedigree and vintage of the management team.

Investment Options

Most mutual fund schemes offer two investment options – growth and dividend. The dividend option further gets subdivided into the Dividend Pay-out option and Dividend Reinvestment Option. The different modes of investing available are lump sum Investment, SIP (Systematic Investment Plan), and STP (Systematic Transfer Plans). It will help if you read this carefully to choose options that best suit you.

Investor Services

Certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans that can be availed by investors can be found from this section.

Investor Grievance & Penalties & Pending Litigation

Every fund must disclose the investor grievances status in the SAI and the penalty imposed for any economic offense or due to violation of any securities laws in the SID. These are essential to know to judge the credibility of the scheme.

 

To conclude, the offer document is a friend to help you get rid of ignorance and guide to enlighten you as an investor. Never rush with investment. If you find reading voluminous offer documents difficult, at least you can read KIM and do understand it well. Be aware of the available options and don’t hesitate to take the help of mutual fund distributors or agents or relationship managers to make a prudent decision.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh