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Know your investments: Mutual fund offer document - Part 1

Know your investments: a series of pieces where we help you understand the technical aspects of your investment products in a simple manner. While several things hold us back from making investments, at times, they are the marketing efforts by the mutual fund houses themselves.

Every mutual fund ad tells us to “read the offer document carefully before investing”, which could leave many of us wondering:

  • Should I even be investing in this?

  • What exactly is an offer document?

  • Is it really important to read the offer document?

While a mutual fund offer document is a rather lengthy document, we are going to simplify it for you.

1. What is an offer document?

Simply put, it is a detailed brochure of a Mutual Fund Scheme, giving all the information needed to make an informed investment decision. These offer documents are available for all mutual funds.

2. Why is it important to read before investing?

Well because, as an investor, the responsibility is on us to understand the scheme details, and hence, we cannot seek legal protection on the grounds of not being aware, on information fairly and transparently stated in the Offer Document. Below are the top things to read in the offer document and make the best choice for our portfolio :

  • Investment Objective

Much like our financial objectives, each fund has a defined objective as well. This is a single statement that summarises the goal of the scheme. This goal also indicates the investment strategies of the fund manager. For example, the investment objective of a large-cap fund could be

To provide long-term capital appreciation/income by investing predominantly in Large-Cap companies. There is no assurance that the investment objective of the Scheme will be realised.

This description helps you determine whether the scheme is suitable for your goals, based on your risk appetite (you could take your risk assessment check on the Basis app).

At Basis, we evaluate all details related to investment decision making and match your financial goals to mutual funds with objectives that will help you reach your goal.

  • Riskometer

The riskometer is a pictorial representation of the risk to the amount you might have invested. These are broadly categorised into five levels of risk, as shown in the table below.

Eg. The riskometer of a short term debt fund looks like this:

This pictorial representation helps you understand whether the risk of the fund is suitable for your personal risk profile.

  • Asset Allocation

This section mentions all the investments that a particular fund holds and the proportion of each investment.

  • Past Performance against Benchmark

While the past performance of a fund is no indicator of future performance, it cannot be ignored either. You can find the one year, three years, five years returns and returns from the inception of the fund as well.

As an investor, you must check for consistency of returns, and how frequently the fund has outperformed its benchmark. This information is updated regularly in the offer documents.

The Basis app already makes it simple by giving details of every scheme:

3. Where do you find the mutual fund offer document?

You can find a mutual fund offer document for every single fund in the market on the respective websites of mutual fund houses or asset management companies. It can also be requested to be sent to you via email from each mutual fund house.

While it is not mandatory to read the offer document, it is recommended to familiarise yourself better to nuances of investing, specifically in mutual funds.

At Basis, we will continue to provide you with more details on various investment products as you progress with your learning experience.

Disclaimer: Parts of this document are extracted from the regulations and guidelines of SEBI to create awareness amongst investors.

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