‘Mutual funds sahi hai!’ It would not be an exaggeration if we say there would be no one who has not heard of this advertisement of late. Along with this, in every literature or advertisement about Mutual funds we see this standard disclaimer “Mutual Fund Investments are subject to market risk. Please read the offer document carefully before investing.” Though there are a lot of benefits of mutual funds, this one liner gives discomfort to a lot of us. It is true that Mutual fund investments are subject to market risk, in fact all security market investments are subject to such risk. Even deposits of banks are also not completely secure to that matter. Each investment comes with its own return and risk. All that we can do while investing is to know the quantum of risk and it should be a calculative risk that is measurable and bearable to one’s own risk appetite or risk tolerance.
How do you know the risk in a Mutual Fund?
Now, to know this we should look at the other part of the disclaimer which says ‘please read the offer document carefully before investing’. Yes, we all have heard this statement but haven’t seen these offer documents or know what it is. Here let us look at what are these offer documents and how do they help us in understanding the mutual fund scheme better. A better understanding of the offer document will help any investor to know the suitability of such scheme to his/her requirements and also the risks involved in it.
The first and foremost document of a mutual fund is standard scheme offer document. The purpose of a scheme offer document is to provide essential information about the scheme in a way that will assist investors in making informed decisions about whether to purchase the units being offered. These Offer document consists of two parts:
- Scheme Information Document (SID). SID carries important information about the scheme(s) such as their investment objective, asset allocation pattern, investment strategies, risk involved, benchmark indices for respective scheme(s), who will manage the scheme(s), fees & expenses; amongst a host of others for making an informed investment decision.
- Statement of Additional Information (SAI). SAI contains all statutory information of the Mutual Fund house.
Both SID and SAI are prepared in a format prescribed by the security market regulator SEBI and submitted to it. The content of the document needs to flow in the sequence prescribed in the format. In addition the mutual fund is permitted to add any disclosure which it feels is material for the investor. The other information in SID are dividends and distributions, Inter scheme transfers, Associate transactions, Borrowing by the mutual fund, NAV and Valuation of assets of the scheme, Redemption or repurchase, Accounting policies, Tax treatment, and Investors rights and services are other important aspects,
Key Information Memorandum
The Key Information Memorandum or KIM is the abridged form of the scheme information document serving the cause of investors by mentioning the key sections of the offer document. This document sets forth the information, which a prospective investor ought to know before investing. There is a standard format prescribed by the market regulator SEBI for KIM also as investors may not be sophisticated in legal or financial matters it is advised by the regulator that care should therefore be taken to present the information in the offer document in simple language and in a clear, concise and easily understandable manner.
The KIM carries the information like Asset Allocation Pattern, Risk Profile , Plans and Options, Applicable NAV, Minimum Application Amount/ Number of Units, Dispatch of Repurchase (Redemption) Request , Benchmark Index, Dividend Policy, Fund Name, Manager, Trustee among others. More over KIM needs to be updated at least once a year and as per SEBI regulations, every application form needs to be accompanied by the KIM. One should note that the regulator does not certify the accuracy or adequacy of this KIM.
The Risko Meter
The level of risk in mutual fund schemes is represented by a pictorial meter named “Riskometer” and this meter would appropriately depict the level of risk in any specific scheme. This has five different labels namely Low- principal at low risk, Moderately Low – principal at moderately low risk; Moderate – principal at moderate risk; Moderately High- principal at moderately high risk;High – principal at high risk. For enumeration, a scheme having moderate risk would be depicted as under:
It is in investors’ own interest to read these offer documents before investing. These documents are provided free of cost to all investors on request and also available on mutual fund websites. One can seek the advice of Investment adviser for more information on these and also to assess their risk appetite, tolerance and suitability of the mutual fund to their financial goals.
Note: Some parts of this document are extracted from the regulations and guidelines of SEBI for the purpose of creating general awareness.