Most of us must have come across this sentence at the end of every mutual fund advertisement, that “Mutual fund investments are subject to market risk. Please read the offer document or scheme related information carefully before investing.” Those who are new to mutual funds may wonder what is the risk involved? What are the scheme related documents to be looked at?
One of the main scheme related documents for mutual fund investments is the Scheme Information Document (SID). Here, we will discuss SID at length, especially highlighting factors surrounding this document that new investors should know about.
What is a Scheme Information Document?
SID provides:
- mutual fund investors with all the necessary information about the scheme to aid them in making a sound investment decision.
- all the information that an investor needs to understand, whether the scheme suits individual financial goals.
Before investing one’s hard-earned money with the objective of wealth creation from a mutual fund scheme, it is important to read the:
- Scheme Information Document (SID),
- Key Information Memorandum (KIM), and
- Statement of Additional Information (SAI).
All of these documents are prepared by fund houses in the prescribed format, as per SEBI guidelines. These documents specifically contain simple language, which is clear and easy to understand.
What is contained in a Scheme Information Document?
Here are some of the details contained in SID that every mutual fund investor should understand before investing:
- Investment objective:
The investment objective of a scheme states the main aim of the scheme. Some examples of different investment objectives adopted by mutual fund schemes are:
- tax benefit
- long-term capital appreciation,
- consistent returns, etc.
This section also tells investors how the scheme plans to achieve the stated objectives. By looking at a scheme’s investment objective, investors can gauge whether it is in alignment with their personal investment goals. In case a scheme’s objective is modified, the fund house has to mandatorily update the SID for the same.
- Investment amount and related details
The SID includes information like:
- The minimum amount for various scheme-related transactions
- Investment amount for Systematic Investment Plan (SIP) option
- Investment amount for lump-sum transactions
- Minimum redemption amount
- Minimum transaction amount for
- Switching of funds
- Systematic Transfer Plan (STP) and
- Systematic Withdrawal Plan (SWP)
In this section of SID, investors can also find details such as fees and expenses that are applicable to the scheme, such as:
- Expense ratio,
- Exit load,
- Transaction charges, etc.
A scheme with a lower expense ratio can allow higher net returns in the hands of investors. However, while taking an investment decision, investors must consider other factors in combination with the expense ratio instead of solely focusing on expense ratio.
- Risk of investment
Mutual fund investment can come with risks like:
- Interest rate risk,
- Risk of loss due to equity exposure,
- Portfolio concentration risk,
- Liquidity risk, etc.
These risks may impact the capital appreciation that investors expect from the investment. Risks of equity mutual funds may be different from those of debt funds, both in terms of nature and level.
SID elaborates the associated risk factors that could impact the fund performance. Some of the factors that could be listed in SID are:
- Changes in tax rates,
- Political uncertainties,
- Regulatory changes,
- Demand-supply dynamics,
- Macroeconomic factors that could affect the company,
- Impact of interest rate changes
- Credit worthiness,
- Liquidity, etc
SID also states the different measures that the scheme will likely undertake for controlling or mitigating some of these risks. Some of these measures can include:
- diversification,
- active portfolio management,
- liquidity management, etc.
- Scheme’s strategy
The SID also contains the fund’s investment strategy, which should be minutely studied by investors. Every mutual fund scheme will have a unique strategy which can impact an investor’s investment decision. This section of the SID gives insight into the fund manager’s approach for building and managing the scheme’s portfolio. It also states the overall exposure of the fund through investment in different types of investment instruments across asset classes.
- Percentage asset allocation
The scheme information document states the portion (in percentage) of the fund’s pool that will be allocated to different asset classes, like equity, debt, gold, etc. Under normal market conditions, the fund has to maintain the percentage of allocation as stated in the SID.
A small-cap fund, for instance, has to invest a minimum 80% of its assets in equity belonging to small-cap companies. The remaining can be invested in other areas such as large caps, debt or money market instruments. A fund that allocates a larger portion of its pool to riskier asset categories like mid-caps and small-caps may be highly exposed to market volatilities. This information can help investors judge the scheme’s risk profile before making an investment.
- Historical performance
Mutual fund schemes that have been in the market for some time will state historical performance details in the SID. Historical performance details can cover different time frames and the fund’s relative performance against the benchmark index.
Investors must, however, remember that a scheme’s historic returns cannot be used as an indication of its potential future performance. While gauging the potential of a scheme, investors can look at its long-term performance rather than short-term.
- Fund managers
The fund managers of a mutual fund scheme are directly responsible for the performance of actively managed mutual funds. Hence, investors must look for fund manager details in the SID, such as:
- fund manager profile
- experience, etc.
Conclusion
While SID can be as long as close to 100 pages, it is important that investors read the above-mentioned details to help them ascertain the scheme’s suitability to their needs and take an informed investment decision.
FAQs
The scheme information document or SID gives information like NFO dates, highlights, summary of the scheme, historical performance, fund manager details, objective, etc. These details are crucial for an investor to make an apt investment decision.
Key information memorandum or KIM is a concise form of the scheme information document or SID. It contains all the important information in short since it comprises only 1 or 2 pages. This document generally comes attached with the mutual fund application form.
A mutual fund factsheet is a brief about the mutual fund scheme. It gives a snapshot about the scheme and is published on a monthly basis.
To invest easily in mutual funds, you can download the Fisdom app on your smartphone. This app has a seamless KYC and registration process and offers a range of scheme options that you can select as per your risk, return, and time horizon preference.
Mutual fund schemes come with different risk profiles, depending on the investment objective and asset allocation chosen. Equity funds are generally more risky as compared to debt funds.
