Why read all scheme related documents carefully before investing in Mutual Funds?

 “MutualFundInvestmentsAreSubjectToMarketRisks, ReadAllSchemeRelatedDocumentsCarefully.”

What is this? No… my space key has not malfunctioned. But this is how like a bullet the caption is used after an advertisement by a mutual fund company.

But the question is – Why should we read these document? Is it necessary??? Which are the documents, they are talking about?

3 Versions in last 5 Years

First Version “Mutual Fund investments are subject to market risks. Please read offer document carefully before investing.”

Couple of years back in place of offer document – they mentioned “Statement of Additional Information (SAI) and Scheme Information Document (SID)”

Second Version “Mutual Fund Investments are subject to market risks. Please read the Statement of Additional Information (SAI) and Scheme Information Document (SID) carefully before investing.”

Last year there was a major change “please” & “before investing “ is out & now they are talking about “all scheme related documents”.

Current Version “Mutual Fund investments are subject to market risks, read all scheme related documents carefully.”

Investment Guru – Why you should avoid their advice?

Which are the documents they are talking about?

Let’s see which are the documents you should check – links from HDFC AMC

• Scheme Information Document (SID) – 104 Pages
• Statement of Additional Information (SAI) – 118 Pages
• Key Information Memorandum (KIM) – Abridged document of SID & SAI – 64 Pages
• Monthly Factsheet – 54 Pages

Let’s talk about SID & SAI – we will call them “Offer Document” or OD.

Check – ICICI Prudential Opportunities Fund Review

Why you should read these documents?

Offer document is a key source of information for investors and prospective investors regarding the objective and fundamental attributes of a mutual fund.  Offer document is a record of scheme details. This is individual for all schemes and covers various aspects how a scheme will be managed by the fund house.

Below are some of the important points listed which are covered in an offer document and which serves as a guide to present and prospective investors to take decision regarding their investment.

• Date of Issue– An investor should read the latest version of offer document and hence must consider its date of issue. The OD is updated once in a year so that new changes done throughout are incorporated.

• Investment Objectives– It tells what the scheme intends to do. The investment objective of the fund must match with the investor’s investment objective-whether to generate regular income through investment in debt instruments or provide long term capital appreciation through investment in equity and equity related instruments etc.

• Investment Policies– The offer document will outline the asset allocation pattern, diversification policy and other general strategies the fund manager will implement while managing his fund. The asset allocation pattern will determine the fund manager’s flexibility in choosing the appropriate portion of the three asset class- equity/debt/cash.It may also state the type of equity parameters or bond rating the fund manager will invest in. The asset allocation should be inconsistent with the objective of the scheme. Asset allocation pattern along with the risk profile is given in the below format – an illustration:

• Instruments	Indicative Allocation(% of total class)		Risk Profile
  	Maximum	Minimum	High/Medium/Low
  Equity	100%	20%	High
  Debt	80%	0%	Low

  The diversification policy determines the kind of sectors or stocks the fund manager will invest. The investor should consider whether the fund is offering adequate diversification.

• Risk Factors– The investors must access the risk factors associated with his investments. They must ensure that the risk associated with the fund’s investment is in line with their own risk appetite and tolerance level. The offer document list down both the type of risks-standard and specific.

• Information about the scheme: All the minute details about the scheme are mentioned in the offer document. The offer document gives answer to all the basic queries of the investor like who manages the fund, who all can invest, what are the various plans and options available under the scheme, what is the dividend policy, how to apply , how to redeem, what is the benchmark of the scheme and the list goes on.

• Past Performance Data– The offer document highlights the past performance data of the scheme. In case of a new scheme, the offer document carries the statement ‘This is a new scheme and does not have any performance track record.’ In case of existing schemes, those schemeswhich have been in existence for more than a year, compounded annualized returns are given and for scheme in existence for less than a year-absolute return are given. The investor while analyzing the returns must always remember‘Past performance is no guarantee of future returns.’ These returns are just trend analysis showing how scheme has fared in past.

• Fees and Expenses– In the present scenario, fees and expenses charged to fund forms an important point for consideration. Excessive fees charged can affect the returns of the fund in the long term. The offer document list the limits of all the type of fees and expenses charged to the fund like entry load, exit load, annual recurring expenses, management fees etc.

• Key Personnel– The offer documents provide the educational qualifications and work experience of the Key personnel of the AMC. Similar list is also uploaded on amfiindia.com. Key Personnel includes the Chief Executive Officer, Chief Investment Officer-both equity and debt scheme, Compliance head, Sales head, HR head, Operations head and other officers from the top management who play a crucial role in running the AMC. An investor is generally interested in experience and expertise of fund management team who are running his invested scheme.

• NAV and Valuation– This section in the offer document describes the policy with regard to computation of NAV of the scheme in accordance with SEBI (Mutual Funds) Regulations Act 1996. The investor can come to know whether his investments are valued at ‘mark to market rate’ or a different valuation policy is followed.

• Tax Benefit Information– This section enables the investor to gauge whether their investments are enjoying significant tax benefits or not. Mf investment enjoys lot of tax benefits and responsibilities and investor should be aware of these. We still meet investors who think FMP investment qualifies for Sec 80 C deduction. This section enables the investor to plan their taxes in a better way and enhance their post-tax returns.

• Penalties and Litigations-This section contains the details of penalties,  pending litigation or proceedings or investigations for which action may have been taken or is in the process of being taken by SEBI or any other regulatory authority. This forms an important part for consideration for the investor whether to investor in a particular fund or fund house or not.

• Rights of unit holders– The offer document list down all the rights of the investors. There are certain service standards mandated for a mutual fund towards its investors, details of which are provided in the offer document.

• Redressal mechanism– This section mentions the name of the person to be approached by investors in case of their complaints, queries and grievances.

So, when they nonstop mutter at the end of the advertisement reminding to read all these documents, it has significance. My personal experience is that it increases your knowledge in personal finance subject also. Do you know, what’s the meaning of  “insurance is the subject matter of solicitation”.