March 1, 2017

Srikaanth Kumar

What You Should Read in a Mutual Fund Scheme Offer Document


Every time a mutual fund (MF) advertisement runs on television, it plays one line at the end, ‘Mutual fund investments are subject to market risks. Please read the offer document carefully before investing’. Highlighting the risk is compulsory for all MF advertisers.

There is a reason for it. MF may seem to be a convenient investment option. But actually it is quite complex. So it is important for all investors to know about the terms and conditions of different MF policies before making a decision.An MF document can be full of difficult terms.

Here are a some important points for you in a simple way:

Fees and expenses

Your MF investment has a certain value. It includes the fees for the fund house. Usually, the fees are a percentage of your investment value. This percentage may be different for various fund houses and investment schemes. There is also another expense when you redeem your MF units. This happens when you want to close your MF investment. This is the exit load. You need to be aware of these fees and expenses.

Risk factors

All investments come with a risk. The amount of risk may be different for various investments. This section of the policy document gives details on the risks involved in the scheme. You need to read this section carefully. Then you can be aware of various factors affecting your investment.

Investment objectives

Your investment objectives need to match your MF’s goals. So invest in a suitable policy. Your investment should be based on your goals and how much risk you want to take.

Past performance

Past performance of an investment scheme does not always affect its future performance. But you need to be aware of past figures. Then you can make an informed decision. Look at a scheme’s performance in the past decade. See how it performed during rough times. A particular fund may have given good returns when the market was down. That could be a good investment choice.

Benchmark

You can compare your MF scheme returns to a benchmark like the BSE Sensex. This helps you to calculate the possible returns from your MF.

Asset allocation

Every MF scheme invests in different ways. Some may invest only in equities. Others invest only in bonds or government securities. Some may even invest in many options. Asset allocation affects the risks and returns of a scheme. You need to read this section to know if the scheme matches your needs.

Scheme management

Fund managers decide where to invest your funds. So you need to know their qualifications. The MF document tells you about their experience, performance, and investment patterns.

Dividend distribution

Your MF scheme receives dividends. You can reinvest this or credit it to your bank account. Suppose you want to build wealth and increase your returns. Then reinvesting is a better option. This section gives you information on what you need to do with your dividend.

Disclosures

Some details are regularly disclosed to investors. They include the performance of a particular scheme, assets under management, and net asset value. You need to read this section to know when you could receive this information.

These are some must-read sections for every investor. Read the MF document carefully. It is always good to know details about your investments.



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