Mutual Fund Companies or Mutual Fund Distributors who sell Mutual Funds are required by law to send out a prospectus to their clients. A prospectus contains a lot of information. Such as the fund’s investment objective, strategies, holdings, information on the fund manager, risks, past performance, benchmark information, fee structure, and minimum investment amounts, etc. It can also include any disclosures that the Asset Management Company feels is necessary for the investor.
A Mutual Fund Prospectus is a legal document. That is, the AMCs are legally required to send information about their funds to investors. It is issued for offering investment plans for sale.
When you make a mutual fund investment, you get a thick stack of paperwork in the mail. That’s the prospectus, a very important resource if you’re investing in a fund.
Mutual Fund Prospectus
Generally, you get two types of prospectuses. One is Mutual Fund Prospectus or the Mutual Fund Offer Document or the Scheme Information Document (SID). It can range from 50 to 200 pages. SID 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.
And the other is the Statement of Additional Information (SAI) or the summary prospectus. This is an abridged report that ranges from 5 to 20 pages. SAI has all statutory information of the mutual fund house.
Ideally, you should always review both the prospectuses before investing in any mutual fund. But going through all this information can be daunting. Still, it’s important to study it well. Best would be to go through the prospectus thoroughly before you invest in the fund.
Securities and Exchange Board of India (SEBI) has prescribed a format for the preparation of both the SID and SAI. The fund house also has to submit one copy to SEBI.
How to read the Mutual Fund Prospectus
Since the SID contains important details about a mutual fund plan, it is imperative to go through it thoroughly. You must look out for these important aspects. Reading the SID completely will help you evaluate the credibility of the AMC and the particular scheme in which you are planning to invest your hard-earned money. Below is a brief explanation of the points contained in the SID, to give you a better understanding of the document.
Scheme Information Document (SID)
- Scheme’s Investment Objective: It explains the goal behind the launch of a scheme and how it will be achieved. The objective clarifies the ambiguity in the names of the schemes. For example, “Capital Protection Oriented Funds” would not guarantee the protection of your capital. Its objective may be oriented towards capital protection. And hence, the investment objective clears such vaguenesses or any such doubts that the investors may have.
- Asset Allocation – This section indicates how the scheme will distribute its assets to the relevant asset classes (such as debt, equity, and gold) under usual market conditions. The proportion of asset allocation indicates the range of the maximum and minimum exposure to the various asset classes. It will help you judge if a scheme is debt-oriented, equity-oriented, commodity-oriented, etc. And you get an idea of whether the scheme would fulfill your investment requirements or not.
- Investment strategy – This section explains the method or style the fund house will follow while choosing the stocks to invest in. This is vital because the investment strategy reflects the systems and processes the fund house follows. Fund houses that have a clear investment strategy impart a sense of trust in the minds of investors.
- Related Benchmark – A benchmark is chosen for a particular mutual fund plan to structure it according to the other constituents of the benchmark.
- Risk Element – Mutual Funds carry certain risks attached to them which can hamper the appraisal of the investments. Investors should be aware of the various types of risks that the scheme carries so that they can assess if they can tolerate the risks attached while creating wealth for them.
- Fund Manager – The skills of the fund manager are crucial for the scheme’s overall performance in the long run. Some of the qualities that you should look for in the fund manager are the experience, qualifications, track record, etc. This information can be found highlighted in the Mutual Fund Prospectus.
- Past Performance – Though the past performance of a fund does not guarantee its future performance. It can nevertheless be used to guide your investment decision. The SID of an existing scheme will bear the scheme’s past performance over different time frames. Performance data is based on standard formulas established by SEBI. This information can be used to evaluate if the track record clocked by a particular fund fulfills the investment objective of the fund. With its help, you can make comparisons with other funds. When evaluating Mutual Funds Performance, you should look at the track record of a fund over a time period that matches your investment horizon.
- Fees and Expenses – The expenses charged by the fund house are directly proportional to the net returns delivered by a particular scheme. In the endeavor to earn optimal returns for the investor, the AMC will charge exit load, fund management fees, switching charges, etc. These charges are deducted from the NAV of the scheme and, therefore, as an investor you should look for a scheme that has a lower expense ratio. It will help you achieve higher capital gains.
- Investment Options – Most mutual fund plans are offered in 2 options. You can choose to invest in the Growth vs the Dividend option. The Dividend option offers a, further, payout or reinvestment option. Also, there are other 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 check these options so that you can make an informed decision based on your investment goals.
- Minimum investments: Both the minimum initial investment required and the minimum for subsequent investments may be different for each mutual fund plan.
- Tax Benefits Information: Mutual Funds enjoy significant tax benefits under various sections of the Income Tax Act of India. For example, Equity funds enjoy tax benefits on Long Term Capital Gain and Dividend Distribution Tax. A close reading of the tax benefits attached to the fund will enable investors to plan their taxes better and to enhance their post-tax returns.
- Investor Services: Investors may have access to certain services. Such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This part of the prospectus, usually near the end of the publication, will describe these services and how one can take advantage of them.
Key Information Memorandum (KIM)
A Key Information Memorandum or KIM is a condensed form of the SID. It contains a brief about the essential components of the mutual fund prospectus. The KIM contains below information:
- Details of the Fund House and the scheme. Such as the mutual fund plan’s name, AMC and Trustees, etc.
- Information about the scheme such as the inception date, issue date, investment objective, name of the fund manager, risk profile, benchmark index, etc.
- Options and plans offered by the scheme.
- Details about minimum investment requirements.
- Scheme’s past performance over different time durations.
- Exit Load and other relevant expenses.
- Contact details of RTA (Registrar and Transfer Agent).
- Comparison with other existing schemes in the benchmark.
All investors must review the prospectus of a mutual fund plan before selecting one to make sure that they are well-informed of the fund’s fees, risks, and other very important factors and ensure that they align with their investment goals. After reading about the parts above, investors will better understand how the fund functions and what risks it may pose. Most importantly, it will enable them to determine if it is right for their portfolio. If investors need information beyond what the prospectus provides, they can ask for the fund’s annual report. Either on the AMC’s website or through their Mutual Fund Agent.
With so much information to understand and evaluate for each mutual fund plan. Finalizing the right one out of so many available, for your money can be a daunting task.
So, it is recommended that you take the help of professionals. So, it is recommended that you let WealthBucket assist you.
Do call us at +91 8750005655. Or you can mail at [email protected]
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