Jun 14, 2001|
Mutual funds offer document – A must-read
It would be interesting to know how many investors read an offer document before investing in a mutual fund. If some sort of census is taken, the low awareness level among investors should not surprise anyone.
Most investors just see the annual returns, get some ‘hot’ tips from their brokers/agents and dive headlong into the fund. Many of these investors have never heard of an offer document, much less seen one. This report is an effort from personalfn.com to introduce a sense of awareness and familiarity among potential mutual fund investors, to underline its importance and highlight some of its vital points.
What is an offer document?
An Asset Management Company (AMC)/fund sponsor that plans to launch a new scheme is required to formulate the details of the scheme and register it with the Securities and Exchange Board of India (SEBI) before announcing the scheme and inviting the investors to subscribe to the fund. Typically the offer document contains the details of the new scheme is interchangeably called the Prospectus or the Offer Document. An abridged form of the offer document with the application form is called the Key Information Memorandum.
Here are a few very crucial points to be read in the offer document.
What does an investor expect before investing in a fund? He believes his funds are in safe hands and he expects to get reasonable, if not spectacular returns over the investment period. However, an offer document clearly states the following points under the risk factor:
No assurance or guarantee that the objectives of the schemes will be achieved.
Past performance of the fund does not indicate the future performance of the fund.
Tax laws may change affecting the returns on investments.
In the event of receipt of a very large number of redemption requests or a very large value redemption requests there may be delays in the redemption of units.
From an investor’s perspective the first two points are most critical. Often investors have come to expect guaranteed/assured returns. They also expect the fund to repeat a ‘good’ past performance every year.
All the funds have to state various expenses related to a particular scheme in the offer document. Here are a few expenses related to a fund.
Load: The major expense for an investor while investing in a fund is the load. Load is a charge for entering or exiting a particular fund of a fund house. An investor should make note of the load in the offer document for various schemes of the fund as this affects the returns of the fund. As per SEBI, a fund cannot charge an entry or exit load exceeding 7%. While most of the funds have an entry/exit load ranging from 1%-2%, some funds have neither entry nor exit load, subject to some minimum redemption period.
Expense Ratio: The expense ratio is a ratio between the total expenses and the net assets of the fund. This ratio is disclosed in the offer document. An investor should give due consideration to this piece of information before investing in a particular fund. Lower the historical expenses of a fund, higher the returns an investor can expect as these expenses are deducted from the weekly average net asset value (NAV) subject to SEBI regulations, which says that the total expenses charged by the AMC are subject to following limits
* On the first Rs 1 bn of average weekly net asset – 2.50%.
* On the next Rs 3 bn of average weekly net asset – 2.25%.
* On the next Rs 3 bn of average weekly net asset – 2.00%.
* On the balance of average weekly net asset – 1.75%.
Every fund has to disclose the status of investor grievances in the offer document. The AMC has to reveal the number of queries and complaints received towards a particular scheme and the complaints addressed. This information shows investors how proactive and responsive a fund can be towards investor grievances.
Penalties and pending litigation:
Every fund has to disclose any penalty imposed on the AMC/fund sponsor for any economic offence or violation of any securities laws. Also they have to disclose any pending litigation or proceedings towards the Mutual fund, AMC, Trustees and Associated companies or the directors of the AMC.
This piece of information will enable the investor to form a more informed opinion about the credibility of the AMC/Sponsors/Trustees. Obviously a clean chit means high level of credibility.
These were the crucial points that investors need to look out for in the offer document. Investors as a community must strive to rid themselves of ignorance, because while ignorance may be bliss, that’s not really true in the financial world.
More Views on News
Mar 10, 2016
An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.
Feb 29, 2016
Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.
Feb 12, 2016
PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.
Feb 2, 2016
Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.
Feb 1, 2016
Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407