Fund fundamentals

A mutual fund offer document gives you all the details about investment style and risk-return profile.

All mutual fund advertisements have to have this mandatory clause... "Mutual funds are subject to market risks. Please read the offer document carefully before investing."

READ THE FINE PRINT

SCHEME SUMMARY: To get an overview of the various features of the scheme

INVESTMENT DETAILS: To get more in-depth information about investment process, fund management and even fund valuation details

INVESTOR SECTION: To get various procedures relating to the investment

UNITHOLDERS' RIGHTS: To get details on the information and services that they are entitled to

OTHER INFORMATION: To get information about investor complaints, other schemes performance and litigation details

In fact, SEBI has recently tightened the guidelines by asking the mutual funds to give five-second footage to this clause and even introduced a no entry load clause for direct investors.

But ask most investors if they read the offer document and most likely, you will get a blank response. This is because most would be following the advice of their investment consultant.

For the ones who cannot afford an investment advisor, the decision-making is generally influenced by advertisements and tele-callers of companies who tout their products aggressively. No wonder, many investors end up buying high-cost Ulips in place of mutual funds.

The common reply for this ignorance or lazy behaviour towards investing would be, "Oh, the offer document would take too much time to read." True, but when you are putting in your hard-earned money to invest, a little more diligence is required. Here's some help on what to look for in a mutual fund offer document

Investment of corpus: This will tell you where the money is going to be invested, so as to achieve the investment objective of the scheme. It's important because looking at how the investment will be structured will give a clearer picture of the kind of instruments the fund will invest in.

For instance, if a scheme is looking to invest 35 per cent of its funds in overseas equities, another 40 per cent in debt instruments and the rest in local equities, then the overall risk-return with respect to the scheme can be understood.

The scheme has a risk return equation that seeks to be moderate even though there is a larger amount in equity. This will be different from a scheme that is investing 80 per cent in local equities and the remaining 20 per cent in debt instruments.

Portfolio disclosure: Another factor that allows an investor to get a good idea about the present operations and the future prospects of the scheme is the portfolio and its composition. 

If the composition consists of good holdings with potential for growth, then the attractiveness to invest or hold an investment in the scheme increases. Most funds declare this composition in regular intervals.

That is, some schemes may go in for a six-month disclosure, which even though within the rules often does not give a clear picture to the investor for a long period of time. There will be others who give a quarterly disclosure as well.

However, remember that looking at the portfolio at very small intervals is not an useful exercise because investing in a mutual fund should be looked at as an long-term objective, and not short-term play.  

Liquidity: It's also important that you look at the liquidity in the scheme. The mutual fund offer document lists out all the details of this. This will include the route and mode of purchase.

There is additional information available, which says that in case of adverse circumstances, the fund might even close down the further sale or purchase of units. These are usually done in an emergency, but most people are not aware of that.

Valuation parameters: The performance of an existing fund can be gauged through its NAV. There are various instruments that are held by a scheme and each of them has a separate method of valuation. Most people again ignore this because they feel it is not worth their time.

However, in tough times, the proportion of investments in different instruments determines the impact on the scheme and the NAV.

The manner of valuing an illiquid investment or an investment, not yet listed and the time frequency of change in such an instrument's valuation, play an important role in the overall NAV process.

Unit holders' rights: There are several rights that mutual fund investors have like timely receipt of account statements, receipt of dividend, mode of communication about details, access of holdings including online access etc.

Some idea of these rights, while investing in a scheme and specific action that can be taken to enforce them, are highlighted in the offer document that needs careful attention.

The writer is a certified financial planner