Using the Offer Document to help an Investor make a Mutual Fund Investment DecisionThe suitability of a mutual fund to an investor depends upon the features of the scheme and matching it to the needs of the investor from the investment. The legal documents that provide the information that the investor requires is available in the Offer Document and the Key Information Memorandum. The principal questions that an investor needs to find answers for and the sections of the legal documents where they can be found are described below:
1. Is the prospective investor eligible to invest in the scheme?
The segment on New Fund Offer (NFO) and ONGOING OFFER DETAILS in Section III, Sub-Section A and B respectively of the Scheme Information Document (SID) of the Offer Document provides a list of categories of investors eligible to invest in the scheme. Typically this includes Resident adult individuals, Karta of Hindu Undivided Family, Minors through parents/legal guardians and, where permitted by the prevalent laws and regulations and their respective Constitution, investor categories including Partnership Firms and Limited Liability Companies, Companies, Bodies Corporate, Public Sector Undertakings, Association of Persons, Bodies of Individuals and Societies registered under the Societies Registration Act, 1860 and Co-operative Societies registered under the Co-operative Societies Act, Banks (including Co-operative Banks and Regional Rural Banks) and Financial Institutions, Mutual Funds/Alternative Investment Funds registered with SEBI, Religious and Charitable Trusts, Non-Resident Indians, Persons of Indian Origin, Foreign Portfolio Investor registered with SEBI; Army, Air Force, Navy and other paramilitary units and bodies created by such institutions; Scientific and Industrial Research Organizations; Multilateral Funding Agencies/Bodies Corporate incorporated outside India with the permission of Government of India/ Reserve Bank of India; Provident/ Pension/ Gratuity funds subject to their permissible investment limits and such other category of investors as may be decided by the AMC/ Trustee from time to time in conformity with the applicable laws and SEBI (MF) Regulations.The section also lists the persons who are not eligible to invest in the scheme. This includes United States Person (U.S.person*) as defined under the extant laws of the United States of America, Residents of Canada, NRIs residing in any Financial Action Task Force (FATF) declared noncompliant country or territory, Overseas Corporate Bodies.
2. Is the scheme suitable for the investor?The suitability of the scheme will depend upon multiple factors such as the financial need of the investor from the investment, the risk and return preferences, the investment horizon and other individual preferences. The details of the scheme that has to be matched with the investor’s preferences are found in the following sections:
a. The Riskometer and Statement of the suitability of the scheme available on the front page of the SID and Key Information Memorandum gives a snapshot of the risk to the principal invested, the suitable investment horizon for investment and the type of securities that the scheme will invest in. b. The risks in the scheme are listed in the segment on Risk Factors in Section I, Sub-section A of the SID. This section includes standard or general risk factors that affect all mutual fund schemes. These include risks that arise from the nature of mutual fund investments such as the possibility of volatility in the value of the units of the scheme. As value of the underlying securities in the portfolio changes, there is no guarantee or assured return in the scheme. The sponsors are not responsible or liable for any loss arising out of the operations of the scheme beyond the contribution made by each sponsor towards setting up the scheme. The past Performances are only indicative and does not guarantee the future performance of the schemes. The specific risk factors are the risks that arise out of the type of investment the schemes will make. Investments in fixed income securities may have credit risks, interest rate and price risks, liquidity risks, pre-payment risks, reinvestment risks. Equity and equity- related securities are prone to risks of price volatility, unlisted securities have a high liquidity risk, listed securities may also be subject to liquidity risk from lower trading volumes. Investment in foreign securities, securitized instruments, derivatives and others will also have risks that are specific to those types of investments. The strategies adopted by the scheme’s fund managers will also affect the risk in the scheme.
The risk mitigation strategies adopted by the fund management to control and manage the risk associated with investing in specific type of securities will be described in the SID.
c. The Type of Scheme describes the nature of the scheme briefly. It categorizes the scheme as open-ended or close-ended/interval/balanced/income/equity or debt/ liquid/ETF oriented. The information is available in the segment on Information about the scheme under Section II, Sub-section A in the SID. The Key Information Memorandum (KIM) also describe the investment objective in the first section under Scheme Details.
d. The segment on Information about the Scheme under Section II, Sub-section B of the SID describes the Investment Objective of the scheme that helps investors match their objective to that of the scheme. For example, the Investment Objective of an equity fund is likely to be that it seeks to generate long-term capital appreciation from a portfolio that is invested primarily in equity and equity linked instruments. Schemes may also define a primary objective and a secondary objective. This description helps investors determine whether the scheme is suitable for their needs. The Investment objective is also available in the segment on Highlights/ Summary of the Scheme at the beginning of the Offer Document. The key Information Memorandum (KIM) also describe the investment objective in the first section under Scheme Details. The Investors can get a quick idea of the focus of the scheme in term of generating returns in the form of income or growth and the type of asset classes in which the scheme will invest.
e. The segment on Information about the Scheme under Section II, Sub-section C of the SID describes the Asset Allocation of the scheme. The proportion of the net assets of the scheme that will be invested in different asset classes such as equity, debt and others and the level of risk in each of these asset classes is provided to help investors assess the level of risk in the scheme as also understand the nature of returns of the scheme. The offer document also describes the types of instruments that the scheme is likely to invest in. Section II, Sub-section I of the SID gives details of the regulatory restriction on the investments that the scheme will make. The Key Information Memorandum (KIM) also gives the asset allocation pattern in the first section under Scheme Details.
The Investment Strategy that will be followed by the scheme is detailed under Section II, Sub-section E of the SID. This section informs investor about the philosophy adopted to identify securities to be included in the portfolio, rebalancing the portfolio and approach to selling investments held. All these factors will affect the risk and suitability of the scheme to the investor. The investment management structure created in the Asset Management Company to make investment decisions is also detailed in the offer document. The section on Comparison of Existing Schemes in the KIM also briefly discusses the investment strategy and risk mitigation strategies that will be followed by the scheme.All these elements of the scheme help an investor decide on the suitability of the scheme.
3. When can an eligible investor buy units of the scheme directly from the mutual fund?The Type of Scheme will determine when the investor can invest in the scheme. If it is an open-ended scheme then the nvestor can buy units of the scheme during the New Fund Offer (NFO) period and in the continuing investment period as defined in the offer document at the applicable NAV. In case of a Closed-ended scheme, the investor can buy units of the scheme from the mutual fund only during the NFO. In case of interval schemes the investors can buy units directly from the mutual fund at the time of the NFO and during the Specified Transaction Periods at the applicable NAV. This information is available on the cover page of the Scheme Information Documents (SID) and the KIM. The description of the scheme as open-ended/close-ended/interval, along with a line on when the units will be offered by the mutual fund gives the information that the investor requires. Parts A and B of Segment III of the SID which deals with the details of the Units and Offer also provide information about when the investor can invest in the scheme.
4. How does an investor apply for Units of a mutual Fund scheme?The information available in the Statement of Additional Information (SAI) and the Scheme Information Document have to be read together to get all the information on how to apply for the units of a scheme. The information available in the SID under Section III, Sub-sections A and B respectively for NFOs and Ongoing Offer read along with the information in Section II of the SAI provide information on who can invest, information to be provided in the application form, points at which the application can be submitted, the modes of payments for purchases made and the details to be provided for each option available for payments and restricted modes such as third party payments along with exceptions, the mandatory information to be provided such as Permanent Account Number (PAN), bank account details and compliance with Know Your Customer (KYC) norms and exceptions to the rules (if any), the cut-off time for submission of applications, facilities and modes available for transacting in the units, regulations specific for any special category of investors such as minors, NRI and PIO investors, the facilities available to investors such as holding investments in demat form, and any other information that a prospective investor may require. The application form attached to the KIM also provides all the information required to complete the application and make the investment.
5. What is the price at which an investor can buy and redeem units of the scheme from the mutual fund?The information available in the SID under Section III, Sub-sections A and B respectively for NFOs and Ongoing Offer provide the information on the price at which investors can purchase and redeem units. The price will depend upon the applicable NAV for the transaction, which in turn will depend upon the cut-off time prescribed for the particular type of scheme and the transaction value. The segment on load structures under Segment IV, Sub-section C of the SID describes the impact of loads on the redemption price of units. The section on Scheme Details in the KIM also provides information on the applicable NAV for transactions.
6. What is the maximum and minimum investment that an investor can make?The segment on Highlights/Summary of the scheme available at the beginning of the SID and the information available in the SID under Section III, Sub-section A and B respectively for NFOs and Ongoing Offer provides details of the minimum amount of purchase that has to be made and the minimum balance that has to be maintained in the folio. The minimum amount for which redemption requests have to be made is also mentioned. This information is also available in the KIM.
7. What are the plans and options available to the investor under the scheme?The segment on Highlights/Summary of the scheme available at the beginning of the SID and the information available in the SID under Section III, Sub-sections A and B respectively for NFOs and Ongoing Offer provides details of the different plans, Regular and Direct, for making the investment. Each plan offers options such as dividend payout and growth, dividend re-investment and dividend sweep, the details of which are also provided. This information is also available under the Scheme Details in the KIM.
8. What are the modes available to the investor to make investments?The segment on How to Apply found in Segment-II of the SAI provides information on the various ways in which the investor can transact with the mutual fund. This includes transacting directly with the mutual fund either physically or via Internet, through channel distributors, electronic mode, stock exchanges and others. The information is also available under Section III of the SID and in the KIM.
9. When and how can the investor redeem their investment?The segment on Highlights/Summary of the scheme available at the beginning of the SID provides a summary of the Liquidity in the investment in the scheme. The information available under Section III of the SID provides details of the price for redemption, the cut-off times for submitting the requests and how the request can be made and the modes by which the payments will be made for different categories of investors. Segment II of the SAI on How to Apply has a section on the right of the mutual fund to restrict and even suspend redemptions. This information is also available in the KIM.
10. What are the fees and expenses that an investor has to bear for investing in the mutual fund scheme?Section-IV of the SID details the different categories of expenses, fees and loads that affect the returns to the investors in the scheme. The fees are charged to the scheme and the NAV reflects the adjustment. The loads are paid by each investor out of their investment value at the time of exit. Examples provided in this section make it easier for the investor to understand the impact. Information on the transaction charges that the investor directly pays is mentioned in the segment on Highlights/Summary of the scheme available at the beginning of the SID, The Scheme Details section of the KIM also provides information on the loads, fees and expenses charged to the scheme.
11. What are the special products and facilities available to investors in a mutual fund scheme?Section-III on Units and Offer in the SID discusses special products and facilities available to the investors in the scheme such as systematic investment plans, systematic transfer plans, triggers, switch options, dividend transfer plans.
12. What are the various sources of information available to the investor in mutual funds?The information available under Section-III of the SID provides details of the periodic information that the mutual fund will provide to the investor on the investments held in their folio through an account statement or other communication. Apart from account specific information, sub-section C of the section also details the periodic disclosures that the investor can access on the current value of the units, performance of the scheme and portfolio of the scheme. The performance of the scheme and that of its benchmark is provided in sub-section J of section II of the SID. This information is available in KIM too. The KIM contains information of the historical performance of the scheme along with that of the benchmark for various investment periods. It also provides information on the portfolio holdings of the scheme.
13. Where can an investor find information of the constituents of the mutual fund?Section I of the SAI gives complete details of the constituents of the mutual fund. This includes their experience, financial information, performance, key personnel, rights and obligations and other information the investor may require to evaluate the investment.
14. How is the Net Asset Value (NAV) of units of a mutual fund scheme calculated?Sub-section D of Section III of the SID provides the details of computation of the NAV.
15. What are the tax implications of the investment in mutual funds?Segment V, sub-section A of the SAI gives complete details of the tax implications of investing its mutual funds for different categories of investors for different products. Section III, sub-section C of the SID also gives the prevalent tax laws applicable to investing in mutual funds in brief.
16. What are the rights of Unitholders in a mutual fund scheme?The information is available in section III of the SAI. It details the rights to beneficial ownership of the assets of the scheme, timelines for servicing investor applications and acknowledgements, right to receive information and disclosures and to exercise the option to exit in the event of changes in the scheme, and other rights of investors.
17. How will the securities held in the portfolio of the mutual fund be valued?Section IV of the SAI provides the details of the regulatory specifications on how different securities in the portfolio will be valued. The rules for valuation are standardized by the regulator, SEBI.
18. Where can the investor find information of legal and regulatory details that impact mutual fund investments?Sub-section B of Section V of the SAl provides information on legal aspects of the investment that deal with nominations, transfer and transmission of units, investment by, minors, pledge/lien on units and others. The KIM also provides information on some of the legal regulatory details.
19. Where can the mutual fund investor find details of how to register a grievance?Sub-section C of Section V of the SAI provides details of how the investor can register a grievance. This information is available in the KIM too. Download a SAl, SID, and KIM from the website of any mutual fund and go through the sections discussed above for a better understanding of how these documents can be used to understand the features of a scheme.
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