28 March, 2008

How To Read A Mutual Fund Offer Document

Many people today find that they are deluged with information about investing. News programs provide updates on the stock market several times a day. Through the Internet, individuals can check on the performance of their investments at the click of a mouse. But one of the key sources of investment information, and one that some investors may be tempted to overlook, is the Mutual Fund Offer Document.

A mutual fund offer document is a legal document that must adhere to standards set forth by the Securities Exchange Board Of India (SEBI), the regulatory agency that oversees the Indian Mutual Fund industry. The information contained in the prospectus is intended to help you understand what types of securities a fund invests in and the investment philosophy that the Investment Manager uses in selecting individual securities for the fund. The offer document will also provide information on the fund’s income and expenses, a review of historical performance, and information about your ability to purchase or redeem your units. In addition, the offer document will also outline any loads/sales charges that may apply to your investment transactions. By law, mutual fund companies are required to provide you with an offer document before you make an initial investment. Before investing, take the time to read this important document.

Questions to ask before investing
A mutual fund offer document can help you answer the following questions:

• In what does this scheme invest?
• Is the scheme seeking income or capital growth?
• What has been the rate of return?
• What are the options available in the scheme (Growth / Dividend)?
• Is the scheme an open ended / close ended scheme and if there is a lock-in period applicable?

Key Elements of a Mutual Fund Offer Document

The information contained in a mutual fund offer document is presented in several sections. As you read through these sections, you’ll want to evaluate how well the fund matches your investment objectives. Here’s a look at key elements that are contained in an Offer Document.
• Date of issue — A prospectus must be updated at least once in two years.
• Minimum investment — Mutual funds differ both in the minimum initial investment required
and the minimum for subsequent investments.
• Investment objective — This section states the investment goal of the fund, from income to
long-term capital appreciation, and may state the types of investments that the scheme invests in, such as government bonds or common stocks. Be sure the scheme’s objective matches your investment goal.
• Investment policies — An offer document will outline the general strategies the Investment
Manager will use in selecting individual securities. This section may provide further information about the securities in which the scheme invests, such as ratings of bonds or the types of companies considered appropriate for a fund.
• Risk factors — Every investment involves some level of risk. The scheme offer document will
describe the risks associated with investments in the scheme.
• Fees and expenses — Sales and management fees associated with a mutual fund must be clearly listed.
• Tax information — An Offer Document will include information on the tax treatment of
dividend and capital gains, including information on deduction of tax at source
• Investor services — Unitholders may have access to certain services, such as automatic
reinvestment of dividends, systematic investment plan (SIP), systematic withdrawal plans (SWP) and systematic investment plan for corporate employees. This section of the prospectus, usually near the back of the publication, will describe these services and how you can take advantage of them.

A prospectus generally ranges from 20 to 30 pages and includes a table of contents. The scheme offer document may be amended from time to time and attaching an addendum which highlights the changes e.g. change in load structure, introducing of a new facility etc. usually reflects this.
It is therefore important for investors to read the offer document in detail to be able to understand the features of the scheme and get the best out of the services offered by the Investment Manager.

Source : DSP Merill Lynch Mutual Fund

Note:: I have maintained a seperate blog on Mutual Funds & AMFI Certification visit http://amfi-certification.blogspot.com

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