Jun 02, 2017 4 min read

How to Read the Scheme Related Documents in Mutual Funds?

Do you know which documents you need to read about mutual funds you intend to invest in? Here they are.
Have you noticed that every mutual fund commercial ends with a note of caution: “Mutual fund investments are subject to market risk, read all scheme related documents carefully?” Do you understand what does it signify, and why they say so? Let’s help you understand the same.

As we know that mutual funds have investments in the securities falling in different categories in the market and their returns are drawn as per the market movements, the invested capital is termed to be in subject to market risk as one can never assure the fixed amount of return to fetch from a fund. There are strong variations due to several micro and macroeconomic factors which cause heavy fluctuations in the values of the invested money.

On the flip side, the latter part of the note, i.e., read all scheme related documents carefully seems easier, but it requires huge understanding and knowledge to evaluate the actuality of the scheme. Here we have tried to let to gain the idea about these facts.

What are Scheme Related Documents?

There are three important documents, viz., Key Information Memorandum (KIM), Scheme Information Document (SID), and Statement of Additional Information (SAI) which constitute the, “Scheme Related Documents”. These are prepared by the asset management companies for a particular scheme or fund and submitted to the SEBI for final approval. They contain the following information about the mutual fund:

  1. All the fundamental attributes like investment objective, asset allocation pattern, fees, and liquidity provisions.
  2. Details regarding the fund managers and team indulged in designing the plan.
  3. The various risk factors constituted in the fund along with the risk mitigation mechanism.
  4. Scheme details like load, plan and options, past record and performance, and benchmark.
  5. Other vital details like list of AMC branch offices, investor service centre, and official points of acceptance.
  6. Information about the mutual fund house, its sponsors, and trustees.
  7. All financial and legal matters.

Let’s now have a look over the various points we need to consider while reading these documents.

  • Investment Objectives : The policies and objectives of the schemes are the most essential elements of offer documents. While scanning them investor will be enlightened about the goals of the specific fund and their expected composition of the underlying portfolio. With this, investors will get a fair idea about the strategies that the fund manager will be using to achieve the said objectives.
  • Past Performance : Some of the crucial elements to be considered by the investors are the inception date of the scheme, the Asset Under Management (AUM) and the past performance of the fund. Investors must compare all these factors with the similar funds in the market as well as against the industry benchmark to get an idea about the fund’s comparative potential. One must opt for such schemes which offered consistent returns over a long-term tenure and could maintain stability even in the negative market trends. However, such information must not be used to predict future profits because “Past performance is not an indicator of future returns”.
  • Risk Factors : The documents clearly define different types of risks that the scheme will be exposed to. You must make an informed decision on the basis of your own outlook and understanding of the market trends. Clearly study, understand, and evaluate the same so as to opt for the perfect fund as per your risk-bearing capacity. You must keep one thing in mind that mutual fund houses are stipulated by law to disclose all the types of risk involved in the fund to avoid discrepancies, but you must not get overwhelmed by all of them.
  • Fees, Loads and Taxes : You should learn about the minimum investments, charges applicable and services available to you by the fund house for buying such scheme for your portfolio. There are some common costs applicable which include Entry and Exit Loads, Transaction Charges, Security Transaction Tax, and some other expenses for fund management, together called the Total Expense Ratio. You must understand that all types of charges are not the same of every fund, and that all of them are regulated by the Securities and Exchange Board of India.
  • Key Personnel/Fund Managers : The scheme related documents give you significant perception about the credentials of the fund managers who are responsible to handle the investments to let you know about their experience and investment style.

So with this, it can be concluded here that, “Investment in knowledge pays the best interest,” and the investors must attain adequate details about the funds prior to investing in them. After all, it involves money matters.

MySIPonline and team are always there to help you understand different factors which you need to learn about investing in mutual funds online. If you need any financial advisory assistance, you must get associated with us right away.