7 must-read things in a mutual fund offer document

Kavya Balaji   /   March 3, 2021

Mutual funds are the ideal investment choice when it comes to investing for your long-term financial goals. However, there are many factors that you need to consider before investing in any mutual fund that’s available in the market. These include the time horizon for your financial goal, your risk tolerance, the amount you want to invest, etc. This will help you choose the right mutual fund category. Once you know the kind of mutual fund you need, you need to consider the mutual fund schemes that are being offered by different fund houses. When you have selected your fund, you need to understand all about the fund before putting money in it. This is where a mutual fund offer document is useful.

What is a mutual fund offer document?

The Scheme Information Document (SID) or the mutual fund offer document is a brochure that has all scheme related information including the mutual fund’s investment objective, its investment strategy, the fees associated with the mutual fund, benchmark of the fund, fund manager details, etc. You can easily find this offer document on the fund house’s website and can download it. You can get a hard copy from the fund house’s office, if needed. The document is useful in understanding if the mutual fund is the right one for you. Here’s what to look at in the offer document.

Investment objective

The investment objective explains the aim behind launching the particular mutual fund scheme and how the fund house will achieve the objective. You need to make sure that the investment objective of the mutual fund matches with that of yours. The most important reason why you need to read the investment objective is because it often might not match the scheme name. For instance, capital protection oriented mutual funds do not actually offer capital protection. Reading the investment objective will help you understand what the scheme will be doing for the investors.

Asset allocation

In the SID, asset allocation of the mutual fund will be mentioned. It will state the asset allocation that the fund will follow under normal market conditions. As you might know, the asset allocation of a fund will show the allocation of the Assets Under Management (AUM) to various asset classes such as equity, debt, gold, etc. Asset allocation of the mutual fund will help you determine whether the particular mutual fund scheme is equity, debt or a hybrid fund and whether it matches your risk profile.

Typically, none of the mutual funds will have a fixed percentage that is mandated for a particular asset class. The asset allocation for each of the asset classes will be given as a range. For instance, a fund might invest 65% to 90% in the equity asset class. This indicates that the exposure to equities will be at least 65% and can go up to 90% of the total investable amount of the scheme. The fund manager will stay within the given range at any point in time. Note that if there is any change in the asset allocation provided it needs to be notified to investors. 

Investment Strategy

While the investment objective of the fund provides the aim of the fund, investment strategy will tell you how the fund will achieve this objective. Investment strategy given in the SID explains the approach that will be followed by the fund while selecting different securities (equity or debt) for investment. It tells you about the investment processes and systems that will be followed by the fund house. 

The investment strategy of the fund will also consist of other details such as diversification of the fund’s portfolio, the sectors the fund will be selecting for investment, the top companies that will be a part of the portfolio, etc. You need to make sure that the diversification of the fund justifies the fund’s investment objective.

Fund’s expenses

Every mutual fund has recurring costs which the investors will need to pay when they invest in a mutual fund. This includes costs such as management fees, trustee fees, distributor commissions, etc. Your net returns from a particular mutual fund scheme will be higher if the fees and expenses charged by the fund house is low.  A fund with a high expense ratio or entry/exit loads will affect your investment’s long-term gains. So, select funds that have lower costs.

Risk Factors

You need to understand your risk tolerance. However, you also need to understand the kinds of risks the mutual fund will be taking to achieve its objective. Every mutual fund comes with its own set of risks. These include credit risk, interest rate risk, liquidity risk, etc. These might cause an impact on your investments. 

Moreover, other than the standard risks, there may be scheme specific risks also. For instance, if you invest in international funds, your investments might be exposed to the specific country risks (geopolitical and economic risks associated with the country of investment) where the mutual fund invests. So, it is good to understand these risks and determine whether you are willing to expose your investments to such risks.

Fund managers 

Mutual funds are professionally managed funds. Fund managers buy / sell securities on your behalf. A fund manager who has many years of expertise and industry experience may be better at managing a fund than a beginner. The quality of the fund manager is also important as this determines the profits the scheme will be making. Hence, make sure that you read the detailed information about the fund manager/managers in the SID. You need to look for the fund manager’s experience, his/her track record, qualifications, etc. 

Investment securities

You need to understand if the mutual fund will have exposure to riskier securities such as derivatives, futures or options. However, note that if a mutual fund scheme takes exposure to derivatives only for hedging their positions, it is not risky. It reduces the risks. 

Need help choosing the right mutual funds? Get in touch with wealth experts at wealthzi.com today. 

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