All Mutual Fund advertisements ends with “Read the offer document carefully before investing”. But have you read one? Are you sure your agent/advisor has read one? Well, Offer document & KIM are tough & non-fiction reads. So many of us do not bother to go through offer document & KIM before investing. Let see in details the contents and importance of OD & KIM.
Just as you compare the features of a Mobile Phone you wish to buy, it is essential to read the Offer Document & KIM before you invest your hard-earned money.
We often read what interests us like a magazine, a novel, or it may be just newspapers. But when it comes to investing, even reading portions of the SID (Scheme Information Document) or Offer Document & KIM (Key Information Memorandum) will help you make an appropriate investment decision.
So let us understand each of these areas or portions of the Offer Document & KIM in detail.
Mutual Fund Offer Document & KIM
Let’s start with OD. Offer document or a prospectus from a mutual fund house is a document offering its scheme(s)to the public for investing.
Offer document consists of two parts i.e. Statement of Additional Information (SAI) and Scheme Information Document (SID).
SAI contains all statutory information of the Mutual Fund house like its sponsor, offices, team etc.
SID carries important information about the scheme such as their investment objective, asset allocation pattern, investment strategies, the risk involved, benchmark indices for the respective scheme, who will manage the scheme and fees & expenses; amongst a host of others for making an informed investment decision.
Both SID and SAI are prepared in the format prescribed by SEBI. These are submitted to SEBI and approved by them.
Some important section you should look for
Asset Allocation: This section indicates how a particular mutual fund scheme will allocate its assets (such as equity, debt, and gold) under normal market conditions. It also provides a range is provided indicating the minimum and maximum exposure to the respective asset classes.
The Investment Strategy: The investment strategy explain
s the approach the mutual fund scheme would adopt while selecting the instruments (equity, debt or gold) for investment. The investment strategy reflects the processes and systems followed by the fund house as a whole.
Benchmark: It is vital to know how a particular mutual fund scheme benchmarks its performance. Essentially, a benchmark is selected so that the suitable constituents of the same are structured in the portfolio of the respective mutual fund scheme as well.
Risk factors: Risk as you may be aware, hampers the value of your investment in the mutual fund scheme. So you should be aware of the risk involved and evaluate whether you are willing to take risks. Broadly the risks involved in mutual fund investing are Liquidity Risk, Default Risk, Settlement Risk, Interest Rate Risk, Re-investment risk, Economic Risk, Currency Risk, Political Risk etc.
Past Performance: Offer document of the respective schemes would also contain details about their past performances over various time frames. Past performance can be guidance while making an investment decision, but should not be solely relied upon, as past performance cannot be an indication of future performance.
Fees & Expenses: Net returns from a particular scheme is directly proportional to the fees and expenses charged by the fund house. As the mutual fund house has the objective of making money for you, and it also makes money by charging levies (like exit loads), switching charges and fund management fees. The charges and fees are deducted from the respective scheme’s NAV and thus we should look for a mutual fund scheme which has lower fees and expense ratio.
Investment Options: The most common investment options available under a mutual fund scheme are Growth and Dividend – and under the Dividend option you have two sub-options namely, the Dividend Pay-out option and Dividend Reinvestment Option. You have different modes of investing, namely: lump sum Investment as well as SIP (Systematic Investment Plan) and STP (Systematic Transfer Plans).
Investor Grievance: Every fund has to disclose the status of investor grievances in the Statement of Additional Information. The mutual fund house has to reveal the number of queries and complaints received & solved in what duration. This information shows investors, how proactive and responsive a fund can be towards investor grievances.
Penalties & pending litigation: Every fund has to disclose the penalty imposed on the mutual fund house or the fund sponsor for any economic offense or violation of any securities laws in the SID.
So, reading such aspects in the offer document will help you judge the credibility of the fund house you are looking to trust with your hard-earned money.
Key Information Memorandum
Meaning: The Key Information Memorandum (also known as KIM) is the abridged (summary) form of the scheme information document (SID) serving the cause of investors by mentioning the key sections of the offer document.
Securities and Exchange Board of India (SEBI) has provided a standard format for disclosures. KIM needs to be updated at least once a year. As per SEBI regulations, every application form needs to be accompanied by the KIM.
Contents of the Key Information Memorandum
- Details of the Mutual Fund and AMC- the name of the mutual fund, its Trustees, and the AMC
- Scheme Details – the name of the scheme, its investment objective, issue date, inception date, the risk profile of the scheme, benchmark index, Fund managers name etc.
- Minimum Investment Details Plans and Options offered by the Scheme
- Performance of the Scheme- Compared to its benchmark index over last 1 year, 3 years, 5 years and since inception
- Loads and Recurring Expenses
- Contact details of the Registrar and Transfer Agent (RTA)
- Comparison of existing schemes managed by the fund house
- Reading offer document & KIM is not so tough as it may seem. Once you read first one or two, it becomes a routine.
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