• HDFC
• 29 Apr 2017
• MF Product

HDFC, Tester

Scheme Information Document (SID) or Offer Document (OD) is a prospectus that enlists the investment objectives and strategies of a particular fund or group of funds. It also mentions finer points of the fund's past performance, managers and financial information.

You can access the ODs on All Asset Management Companies’ (AMCs) websites.

Important Things to Read in an Offer Document:

Date of issue: First, verify that you have received an up-to-date edition of the SID. SID must be updated at least annually.

Minimum investments: Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the required minimum investment.

Investment objectives: The goal of each fund should be clearly defined from income, to long -term capital appreciation. The fund's investment objective should match your investment objective.

Investment policies: SID will outline the general strategies the fund managers. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.

Risk factors: Every investment involves some level of risk. In SID, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns.

Past Performance data: SIDs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in SID are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals.

They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.

Fees and expenses: Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs these all add up over time. The SID lists the limits on these fees and also shows the impact these have had on the fund investment historically.

Key Personnel: This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.

Tax benefits information: Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns.

Investor services: Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the SID, usually near the back of the publication, will describe these services and how one can take advantage of them.