Mutual Funds

Investors need to know: Key details of a scheme

| Updated on: Jul 02, 2011

Before making an investment, investors are urged to read the details available in the scheme's information documents and statement of additional information. According to regulatory guidelines, the Key Information Memorandum (KIM) comes along with the Common Application Form and this sets forth information an investor should know before investing. It is an abridged version of the scheme information documents.

The KIM contains very useful information about the schemes on offer. Some of the useful details which can be gleaned are:

Asset Allocation Pattern and Investment Strategy: he types of instruments such as equity, debt and so on and the percentage allocation to each type. Investors should know how their funds will be invested.

The Comparison Benchmark to compare scheme performance: For example the Benchmark may be the Sensex or the Nifty and the performance of the scheme will be measured against the index.

Plans and Options available under the scheme: Dividend or Growth; under dividend reinvest or payout options may be available. Default scheme options are also mentioned. Special options such as a dividend sweep or trigger facilities, if available, are explained.

Minimum application amounts under each plan and option. Sometimes, investors' applications get rejected as there is an error in the basic minimum amount.

Actual Performance of the scheme measured for the last one year, three years and even since inception. This is compared to the benchmark to get an actual idea of the performance of the fund manager.

The Load structure applicable is detailed. The charges made by the fund managers to the investors to cover the distribution/sales/marketing expenses are called “LOAD.” These can be charged at the time of purchase or exit.

Entry Load is the fee charged when you invest in a scheme. However, this is not currently charged by funds.

Exit Load is charged when investors redeem units – for instance, investors would know if any exit load would be charged for redemption within a particular time period.

Recurring expenses of the scheme is a very important piece of information for investors. Each mutual fund scheme reports an “expense ratio.” This signifies the proportion of recurring expenses that a fund charges to its schemes' assets under management (AUM) year after year. This includes fund management fee, administrative costs and marketing and advertising costs incurred by the fund house. The expense ratio varies across fund houses and schemes. However, SEBI has capped the annual charges and this cap decreases as the AUM increases.

COMMON Information

Along with scheme specific information, the KIM would contain general information for investors.

Risk factors associated with investments, detailing risks associated with equity, fixed income instruments and derivatives. Scheme specific risks are also mentioned. Applicable NAV – rules regarding the applicability of NAV are explained along with cut-off timings for transactions. Contact details for investor enquiries and grievances. The dividend policy of the fund is detailed.

Unit holder information, which is information about the period of mailing of account statements, financial results and portfolio disclosure is given. Exhaustive and detailed instructions are also given for the correct filling of the application form and regarding attachments to be provided along with the application.

Published on July 02, 2011

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