Know your scheme before investing

The key information memorandum has all the relevant information

Very often, we hear of people making a ‘wrong’ investment. Much of this is because most investors ignore a critical aspect of investing – knowing the scheme. Before making an investment, it is always useful to read the details in the scheme information document (SID) and statement of additional information (SAI). The information contained in these two documents is further summarized in the key information memorandum (KIM) which comes along with the application form.

It is an abridged version of the scheme documents with several important facts which an investor should know before investing. They are as follows:

Scheme information: This gives the asset allocation pattern and investment strategy. So you will know the allocation made to equity, debt, gold, etc.

Next comes the comparison benchmark. For example, the benchmark may be the Sensex or the Nifty or any other index against which the scheme performance is measured. Further, details on plans and options are available. For instance, dividend or growth are two plans normally offered; under dividend option, the investor further gets to either reinvest or get cash dividend payouts. Default scheme options are also mentioned in case the investor fails to indicate his option. Special options like a dividend sweep or trigger facilities, if available, are also explained. Along with this, the minimum application amounts under each plan and option are mentioned separately.

The actual performance of the scheme for the last one year, three years, etc., and even since inception in respect of existing schemes is given. This is compared against the benchmark to give an idea of the performance of the fund. Essentially this is the progress card of the scheme.

Charge structure: The charges made by the fund managers to the investors to cover certain expenses are called “load.” The exit load — charged when an investor takes his/her money out or opts to switch between schemes within a certain timeframe — is an important piece of information.

The recurring expense of the scheme is, again, vital 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.

Common information: Details of risks associated with equity, fixed income instruments and derivatives are clearly given. Scheme-specific risks are also mentioned.

Also, rules regarding the applicability of NAV are explained along with cut-off timings for transactions. Finally, detailed instructions are given for correct filling of the application form, especially useful for first-time investors.

Contributed by CAMS Viveka. The views expressed are general practices in the MF industry and may vary on a case-to-case basis.

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Published by

Sudarshan Ranganthan

Breaths Investments, Suggests Wealth Creation Ideas, Lives on Law Of Attraction

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