Mutual Fund Offer Document

"Mutual fund investments are subject to market risks, please read the offer document carefully before investing"

How many times you have heard this or read this in all mutual fund advertisements? Well due to SEBI regulation every mutual fund will flash this warning. I personally think that mutual fund advertisements require a person who can talk at a speed of zillion words per minute before they recruit the guy to read the above statement.

Does anyone really read the offer document? SEBI mandates that as a customer you should read the offer document carefully.

What is an Offer document?

It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. But since it is such a huge document, people rarely read it in entirety.

Key Information Memorandum

So to overcome this distributors usually come up with a KIM. It is shorter than an offer document and provides precious details about the mutual fund. So when you get a KIM, what you should look for as an investor:

Investment Objective

Investment objective will tell you the fund's goal and rationale. This must align with your personal goal and risk profile. For example, you might be looking at a fund which will at the least protect your capital, so reading the investment objective will tell whether a particular fund ensures that.

Asset Allocation

What this essentially gives is the percentage of your funds invested in equity or debts.

Minimum Investment

What is the minimum investment a fund requires. You might be looking at a SIP of Rs100 per month but that might not be available with the particular fund.

Past Performance Data

Although every mutual fund house will keep the warning "PastPerformance is not an indicator of future returns" but that is usually not true. A fund's past performance is a key factor in deciding how a fund will perform. I personally think that everyone should stay away from NFO, since they dont have any past performance.

Every investors must read the historical performance of the fund, and he should be looking at both the long and short-term performance. A fund's performance over a period of time should match with their own investment goals. They must compare the fund performance against that of the benchmark chosen by the fund.

Entry and Exit Loads

This is another most important information, since heavy entry and exit load will eat up into your investment growth. There are also other charges like switching charges or recurring charges or management fees. Over a period of time they can be considerable amount, so be aware of them.

Hope all investors be more aware of the pitfalls of this fantastic investment scheme.

1 comment:

  1. Nice and informative post on Mutual Fund investment risks.
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