Intermediate

Varsha, 37, stares at the TV screen. The screen flashes an advertisement for a mutual fund scheme. The advertisement ends with a disclaimer, ‘Mutual fund investments are subject to market risks; read all scheme-related documents carefully’. Varsha has been watching the advertisement without really paying attention to it. However, when she hears this, she suddenly becomes alert. She realizes that she signed a mutual fund application form the previous day based on a recommendation from a mutual fund distributor who usually makes rounds at her office to sell mutual fund schemes to the employees. The distributor asked Varsha a number of questions pertaining to her finances, her affinity towards investment risk and her demographics (e.g. age, income). However, on her part, Varsha was not really bothered to check anything about the scheme. She invested in it purely on this distributor’s recommendation. She decides to check out the investment documents the very next day.

Following are the documents that Varsha needs to check:

Scheme Information Document:

Every mutual fund schemes has a scheme information document (SID), which provides all the details about the scheme. This is a comprehensive document providing nearly every bit of information related to the scheme. Here are the key sections that are important to read:

1. Type of scheme: This section indicates whether the scheme is open-ended or close-ended and whether it’s an equity, debt, hybrid or other type of scheme. While open-ended schemes can be redeemed with the mutual fund itself at any time, close-ended schemes can only be redeemed (with the mutual fund) after the defined period or sold on the stock exchange where they are listed. Equity funds carry a higher return potential, though with higher risk; debt funds have a lower return potential than equity, but also carry a lower amount of risk. Hybrid funds (part equity and part debt) carry moderate risk-return potential.

2. Investment objective: This section enumerates what the scheme aims to achieve. You can find out about the goals of the fund and the expected composition of the underlying portfolio. You can also get a fair idea of the strategies that the fund manager will use to achieve the said objectives. Match these objectives with your investment objectives (i.e. whether to generate regular income through investment in debt instruments or provide long-term capital appreciation through investment in equity and equity-related instruments) and your risk appetite.

3. Suitability: This section explains what kind of investors should consider the scheme. For instance, for an open-ended equity scheme, it will state that the scheme is suitable for investors who seek long-term capital appreciation and investments in high-growth companies along with the liquidity of an open-ended scheme through investments primarily in equities. This helps you decide whether you will be comfortable investing in the scheme based on its objectives and risks.

4. Riskometer: This is a visual that looks like the speedometer of a car; it indicates the level of risk inherent in the scheme. It has five sections – low, moderately low, moderate, moderately high, high. The needle points to the level of risk attributed to the scheme. This helps you assess whether you will be comfortable with the inherent risk in the scheme.

5. Asset allocation: This section states how much of the corpus will be invested in each asset class. For instance, for an open-ended equity fund, the following may be provided:

6. Benchmark index: The index to which the performance of the scheme will be compared is stated here. For instance, for an equity fund, the benchmark index may be the Standard & Poor’s Bombay Stock Exchange (S&P BSE) Sensex or the Nifty 500. This will help you assess the scheme’s performance vis-à-vis a suitable index as a benchmark.

The SID will also provide details such as the plans available (direct plan or regular plan), minimum, maximum and incremental investments, scheme expenses that investors need to bear, systematic investment plan/systematic transfer plan (SIP/STP) information, dividend policy and similar information. Other than these sections, a large amount of legal and process-based content may help you in better understanding the fund.

Note: For an existing scheme, it’s important to read the SID with the statement of additional information (SAI); the SAI provides additional information about the mutual fund house and its schemes, as enumerated below.

Statement of Additional Information:
The SAI carries the following information:

• Definitions, abbreviations
• Information about the mutual fund (e.g. constitution of the fund, sponsor, trustee, asset management company)
• How to apply for schemes of the mutual fund
• Rights of unit holders
• How securities are valued by the fund
• Tax, legal and other information

Key Information Memorandum:

The key information memorandum (KIM) provides the most important aspects of the scheme that an investor must consider. It is like a synopsis of the SID. It specifically provides the following information:

• Scheme suitability
• Riskometer
• Investment objective
• Asset allocation pattern
• Investment strategy
• Risk factors and risk mitigation factors
• Plans and options
• Minimum investment
• Dividend policy
• Information about the fund manager/s
• Historical performance of the scheme
• Expenses of the scheme
• Scheme’s portfolio – top 10 holdings as a percentage of the net asset value (NAV)
• NAV reporting information
• Contact for investor grievance
• Other information that applies to unit holders, such as loads on bonus/dividend reinvestment, commissions to distributors, taxes, depository information, transaction charges and account statements

Fund factsheet:

A fund factsheet is a snapshot of the scheme. It provides a bird’s-eye view of what the scheme is about. Fund factsheets are published on a monthly basis by mutual funds. A fund factsheet covers the following parameters:

• About the scheme in brief.
• Scheme type.
• Investment objective.
• Product suitability and riskometer.
• Scheme returns over different time periods – 1 year, 3 years, 5 years and since inception. Returns are computed as compound annual growth rate (CAGR) returns (annualized returns). Returns of the scheme are compared to the scheme’s benchmark index.
• NAV of the scheme.
• Scheme’s portfolio: This is presented in the form of a list of securities invested in and in the form of sector-wise breakup (in case of an equity fund).
• Fund managers of the scheme: Names of the scheme’s fund managers and number of years of experience of each fund manager.
• Investment options available: Dividend payout, dividend reinvestment, growth.
• Minimum subscription amount and multiples.
• Minimum additional investment and multiples; minimum SIP amounts and multiples, as well as SIP frequency.
• Exit load on redemption/switch-out.
• Dividend history.
• Total expense ratio.

Account statement:

The account statement details your holdings and transactions in the mutual fund scheme. The mutual fund sends it within five business days of receipt of the investment application. It is sent via email or in physical form as per the investor’s request. The account statement provides the following details:

• Purchases made - number of units, purchase NAV, charges, amount invested
• Redemptions completed – number of units, redemption NAV, exit load, if any, charges, amount redeemed
• Switches - source scheme: number of units, redemption NAV, exit load, if any, charges, amount redeemed; target scheme: number of units received, purchase NAV, charges, amount invested
• SIP - number of units, purchase NAV, charges, amount invested
• STP - source scheme: number of units, redemption NAV, exit load, if any, charges, amount redeemed; target scheme: number of units received, purchase NAV, charges, amount invested.
  Systematic withdrawal plan (SWP) - number of units, redemption NAV, exit load, if any, charges, amount redeemed
• Dividend transfer plan (DTP) - source scheme: number of units, redemption NAV, exit load, if any, charges, amount redeemed; target scheme: number of units received, purchase NAV, charges, amount invested
• Dividends declared (dividends paid out)
• Dividends reinvested - dividend rate, dividend amount, number of units, purchase NAV, charges, amount invested
• Bonus units received - bonus ratio, number of units received

After the first issue of the account statement, it is sent bi-annually (once every six months) if no transactions are made during the period. In the case of transactions, the account statement is sent at the end of the month.

Along with these documents, it is important to read notices and addenda issued by mutual fund houses in case of any change in details related to schemes.

Varsha is seated across from the distributor, who has come to the office at her request. She has open in front of her all the documents of the scheme she invested in the previous day and the distributor is guiding her to read various key aspects of each document. When she has read the key aspects of the documents with the distributor’s help, she feels a sense of relief. The distributor has helped her make a suitable investment based on her needs. She thanks the distributor and decides to consult him for all her future financial needs.

Varsha is fortunate to have been recommended a suitable mutual fund investment without making her own assessment. However, it is imperative that you study all the scheme-related documents before you invest in any scheme