Mutual Funds

Read, then invest

| Updated on September 21, 2013

Fund Basics

Before making an investment, investors are urged to read the details available in the Scheme Information Document and Statement of Additional Information.

These details are presented in a summarised manner in the Key Information Memorandum (KIM), which comes along with the application form.

It is an abridged version of the Scheme Documents and contains several important facts which an investor should know before investing.

Scheme-specific information

KIM gives information on the asset allocation pattern and investment strategy, i.e. the types of instruments, such as equity, etc. and the percentage allocation to each type. Investors should know how their funds will be invested.

Comparison Benchmark

The benchmark may be the Sensex or the Nifty and the performance of the scheme will be measured against the benchmark.

Plans and Options

Under Dividend, options to reinvest or payout may be available. Default scheme options are also mentioned. Special options, such as a Dividend Sweep or Trigger facilities, if available, are explained.

Along with this, the minimum application amounts under each Plan and Option are mentioned separately. Sometimes, investors’ applications may not be processed due to an error in filling up the basic minimum amount.

Load structure

The charges made by the fund managers to the investors to cover certain expenses are called ‘load’.

These can be charged at the time of purchase or exit. ‘Entry load’, which is currently not charged by funds, is the load charged when you invest in a scheme.

‘Exit load’ is the load charged when investors redeem units. Investors would know if any exit load would be charged for redemption within a particular time period.

Recurring expenses

This is very important 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, marketing and distribution costs incurred by the fund house.

The expense ratio varies across fund houses and schemes. However, the Regulator has capped the expense ratio and this cap decreases as the AUM increases in slabs.

As and when new regulations and guidelines are issued in this regard, investors can get details of how much the fund would charge.

This is also known as the Total Expenses Ratio.

Performance

The KIM gives a snapshot of the actual performance of the scheme over various periods and the same would be compared with the benchmark.

Common Information

Along with scheme-specific information, the KIM contains 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.

NAV applicability

Rules regarding the applicability of NAV are explained along with cut-off timings for transactions.

Contact details for investor enquiries, grievances, details of Official Points of Acceptance of forms are also detailed in the KIM and common application form.

Filling the form

Exhaustive and detailed instructions are given to ensure correct filling of the application form.

These are especially useful for first-time investors. Explanation is given regarding mandatory requirements and even for the actual filling of the mandatory fields in the application form as well as attachments to be provided with the application.

(Contributed by CAMS Viveka, an Investor Education Initiative from CAMS. Views expressed are general practices in the MF industry and may vary on a case-to-case basis.)

Published on September 21, 2013

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