How to Read the Mutual Fund Offer Documents?

Nutan Gupta

13 Apr 2017

It is very difficult to not notice the words of caution after every mutual fund commercial - “Mutual Fund investments are subject to market risks. Please read the offer documents carefully before investing.” How many of us actually read the offer documents? 5 investors in every 100 investors might be going through the documents. Rest 95 either do not know how to read the offer documents or do not consider it important enough to go through the documents.

Here are some important aspects you should consider while reading offer documents:

Investment Objective

This is one of the most important things to look at in an offer document. It gives a fair idea about the thought process of the fund manager and the strategies that he will use in order to achieve the fund’s objectives. An individual can compare these objectives with his own expectations as per his risk appetite.

Past Performance

The past performance of the fund can be looked at to know if the fund has given consistent returns or not. Investors can also look at the launch date if the fund, its total assets under management and compare it with other funds in the similar space. However, this cannot be used to predict future returns, as one cannot determine future returns on the basis of past performance.

Fund Managers

Fund manager is an experienced professional who has an expertise is managing funds. The offer document clearly states who the fund manager to a particular fund is. This gives the investor an insight about the investment style of the fund manager.

Loads and Taxes

The offer document also states all the charges applicable like the entry and exit load, transaction charges and other charges applicable for managing a fund. All mutual funds do not have same charges as the charges vary according to the type of mutual fund.

Expense Ratio

Expense ratio is the ratio which is charged by AMCs to manage an investors’ money. It is charged in percentage terms. Different funds have different expense ratios. However, SEBI has restricted the limit for expense ratios that a fund can charge. Equity funds can charge a maximum of 2.5% and debt funds can charge a maximum of 2.25%.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How to Read the Mutual Fund Offer Documents?

Nutan Gupta

13 Apr 2017

It is very difficult to not notice the words of caution after every mutual fund commercial - “Mutual Fund investments are subject to market risks. Please read the offer documents carefully before investing.” How many of us actually read the offer documents? 5 investors in every 100 investors might be going through the documents. Rest 95 either do not know how to read the offer documents or do not consider it important enough to go through the documents.

Here are some important aspects you should consider while reading offer documents:

Investment Objective

This is one of the most important things to look at in an offer document. It gives a fair idea about the thought process of the fund manager and the strategies that he will use in order to achieve the fund’s objectives. An individual can compare these objectives with his own expectations as per his risk appetite.

Past Performance

The past performance of the fund can be looked at to know if the fund has given consistent returns or not. Investors can also look at the launch date if the fund, its total assets under management and compare it with other funds in the similar space. However, this cannot be used to predict future returns, as one cannot determine future returns on the basis of past performance.

Fund Managers

Fund manager is an experienced professional who has an expertise is managing funds. The offer document clearly states who the fund manager to a particular fund is. This gives the investor an insight about the investment style of the fund manager.

Loads and Taxes

The offer document also states all the charges applicable like the entry and exit load, transaction charges and other charges applicable for managing a fund. All mutual funds do not have same charges as the charges vary according to the type of mutual fund.

Expense Ratio

Expense ratio is the ratio which is charged by AMCs to manage an investors’ money. It is charged in percentage terms. Different funds have different expense ratios. However, SEBI has restricted the limit for expense ratios that a fund can charge. Equity funds can charge a maximum of 2.5% and debt funds can charge a maximum of 2.25%.

Have Referral Code?