10 Things to Look out for in Mutual Fund Document

Investing in mutual funds for meeting long term goals might seem like a lucrative choice, but there are many factors that investors have to take into consideration before going ahead with the actual investment. The very first thing expected from any individual is to have a defined financial goal. The next thing that follows is understanding your risk tolerance and the number of years you wish to remain invested in order to achieve your financial goal.

Mutual funds are an investment vehicle that gives investors exposure to investing in a diversified portfolio. These professionally managed funds collect money from investors sharing a common investment objective and invest this pool of funds in marketable securities across the Indian and global economy. Mutual funds diversify their portfolio by investing in instruments like equity, debt, government securities, corporate bonds, etc. However, investors should bear in mind that mutual funds like equity mutual funds invest predominantly in volatile markets like equity and equity related instruments, making them a risky investment. Also, as mutual fund investments are subject to market risk, returns from these investments are never guaranteed.

But if you have made up your mind and are considering in mutual funds, the first thing you will have to do is get your KYC done. Also, it is better to gather as much knowledge as possible from the mutual fund offer document before you entrust your hard earned money in the fund.

What is a mutual fund offer document?

It is a brochure that is supposed to entail all scheme related information including the fund’s investment objective, its investment strategy, entry / exit load, expense ratio, benchmark, fund’s NAV, past performance, fund manager, etc. An investor can generally find this offer document on the fund’s website, but if they wish, they may contact the fund house and request a hard copy or ask them to send it over via email.

Here are some the things that everyone should look out for in a mutual fund document before investing in the scheme:

1. Investment objective

It is essential that an individual’s investment objective matches with that of the scheme he/she is planning on investing in. Thus, make sure that the scheme clearly states its investment objective so that you are able to identify whether the mutual fund is worth investing or not.

2. Minimum investment amount

The whole point of investing in mutual funds is that they should be feasible enough for investors to invest in lumpsum. For example, if one wishes to invest in mutual funds via SIP, the minimum investment amount might be something which they might find affordable. But that might not be that case with lumpsum payment, as sometimes the amount is high which might not be available with the investor at that time. Hence, it is better if you check the minimum investment amount in the mutual fund offer document.

3. Portfolio diversification

A mutual fund document will always define its investment strategies that the fund managers shall be implementing to meet the scheme’s investment objective. It shall also consist of other things like diversification of the portfolio, which sectors the fund will be investing across, the top companies it has invested in, etc. Make sure that the diversification justifies the fund’s investment objective.

4. Risk

Just like understanding an individual investor’s risk tolerance is necessary, it is better to understand the kind of risk the mutual fund you are about to invest in carries. With every mutual fund, there are several risks associated, these include interest rate risk, liquidity risk, credit risk, settlement risk, etc. which might cause an impact on your investments. Hence, it is better to understand the risks a mutual fund carries and identify whether you are willing to expose your investments to such risks.

5. Past performance

Any mutual fund’s past performance reflects on how the fund has managed to perform in the market. It also gives us an idea if over the years the fund has managed to outperform its benchmark, how it has been performing as compared to its peers, etc. But remember that a fund’s past performance doesn’t indicate its present or future performance.

6. Total Expense ratio

Every mutual fund has recurring costs which the fund house levies on investors as annual fees for owning the fund. This fee is known as Total expense ratio and usually consists of several recurring costs, including management fees, trustee fees, distributor commissions, etc. A fund with high expense ratio might affect an investor’s long term gains, and they might end up paying more to the fund house than gaining any returns for themselves. Hence it is better that you take a good look at the expense ratio mentioned in the offer document.

7. Fund managers involved

Remember that mutual funds are professionally managed funds handled by professional fund managers who buy / sell securities in accordance with the scheme’s investment objective. A fund manager uses his expertise and years of industry experience into managing a fund so that the scheme manages to make some profits. Hence, make sure that the offer document has detail information about the fund manager/managers so that you are convinced that the fund is in the hands of the right management.

8. Taxation on gains

Mutual fund gains are taxed as short term capital gains and long term capital gains, depending on when the investor decides to redeem them. Every mutual fund is taxed in a different way and hence, make sure that the offer document specifies details about how much you might be charged on your gains.

9. Numerous services offered

As a mutual fund unit holder, you are entitled to certain services which are provided to you by the fund house. Check whether the mutual fund offer document has detailed information of services on offer such as systematic withdrawals plans or auto reinvestment option.

10. Growth and IDCW option

Last but not least, do check whether the scheme is available in both growth and IDCW option and depending on your investment goal, so that you may invest in a plan that suits you better.

We hope that you carefully glide through all the above pointers in the mutual fund offer document before investing. Do not rush with your investments. If needed, consult a mutual fund expert / advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.