The fastest way to know your mutual fund scheme

Every mutual fund advertisement on radio or television signs off with the hastily said: "Mutual fund investments are subject to market risks. Please read the offer document carefully before investing. " It is good advice that is rarely taken.

An offer document is a mutual fund's Bible. Not only does it contain every little detail about a scheme, but also the investment objective and philosophy of the fund house. It lays down the scheme's load structure, minimum investment and other such important features.

It is a legal document that describes in ways necessary and possible the intangible product that you may be thinking of buying. The problem is that all this makes it a voluminous piece of work. And, like the Bible, people rarely have the patience to read the whole thing.

To overcome this problem, MFs and distributors have come up with the key information memorandum, or KIM. It is an abridged version of the offer document containing, well, "key information" about the scheme, as well as an application form. In terms of sheer volume, it is easier to tackle than an offer document, and also gives you a good idea about the product. While an average offer document will be 70-80 pages thick, the KIM can manage in about eight, including the form.

Although it is undoubtedly better to read an offer document since it gives a scheme's  complete picture, a KIM is a good alternative if you are pressed for time. However, even in a KIM, not everything is equally relevant to the investor. Some of the important bits are related to investment objective, asset allocation, performance, load structure and minimum investment.

Investment Objective
Your journey through a KIM must begin here. Investment objective talks about the scheme's goal and investing rationale. It specifies where the funds will be invested, in equity, debt, or both. For example, Reliance Banking Fund says its primary investment objective is to generate continuous returns by investing in equity or equity-related fixed income securities of banks.

It is important to read this section as it helps you match your goals as well as risk profile with that of the scheme. A KIM will, however, not have details of the investment process. If you want to know more about your fund's investment objective, read the offer document. In an offer document keep a lookout for claims that your scheme makes and how it aims to justify them.

For example, if your fund aims to protect your capital, or give a regular stream of income, this portion will tell you how it plans to achieve its goal. For thematic or sectoral funds, the investment objective will tell you which sectors it will be investing in. This helps you decide how realistic its goals are.

Asset Allocation

Under the investment objective header, look out for your scheme's asset allocation. This information is given in a tabular form. It tells you the percentage of your scheme's allocation in various assets, like equity and debt. Ensure that your fund invests a significant portion of its assets in relevant categories.

If your fund is targeting more than one sub-class of assets, here's where the details will be mentioned. For instance, HSBC Liquid Plus Fund aims to invest in debt securities that mature, both before and after one year. Under its asset allocation table, HLPF has mentioned the break-up of its corpus towards both these asset classes, along with the risk profile of each type of security (low and low-to-medium).

Performance

If you are investing in an existing fund, check its performance across various tenures to get an overall picture. Although past performance does not guarantee future returns, it gives you a fair indication of how the fund is likely to perform. Also, check the scheme's performance vis-a-vis its benchmark index. Avoid investing in schemes that have consistently underperformed their benchmark indices.

If it is a new scheme, past performance would be absent. As an alternative refer to the track record of the fund house in that segment. For instance, if you are investing in a new equity scheme, check out the past performances of the fund house's existing equity schemes. This will give you a good idea about its historical performance in the segment in which your new fund is in.

Load Structure

When you invest in a MF scheme, not all your investments get deployed in the markets. MFs charge a certain percentage of your initial investment, up front. This is called the entry load. Similarly, MFs may also impose a charge at redemption, called the exit load.

The Securities and Exchange Board of India guidelines for mutual funds mandate that MFs can charge a maximum cumulative load (entry as well as exit) of up to 7 per cent. For instance, HDFC Equity Fund's entry load is 2.25 per cent. This means, that if you invest Rs 10,000 in the scheme, you end up paying Rs 225 as entry load. The balance, Rs 9,775, gets deployed in the markets.

Keep an eye on the exit load too. Usually, MFs charge variable exit loads depending on how long you stay invested. For instance, Quantum Long-Term Equity Fund imposes an exit load of 4 per cent if you withdraw before six months, 3 per cent before 12 months, 2 per cent before 18 months and 1 per cent before two years. QLTF does not impose an exit load if you withdraw after two years.

Entry and exit loads are not fixed. At present, most equity funds charge an entry load, while most debt funds charge exit loads. This is not sacrosanct. It is possible that you end up paying both, entry and exit loads, under the same scheme. Your scheme may have an entry load and no exit load at the time you invest and impose an exit load at the time you decide to withdraw your investment.

While MFs usually pass the entry load to the distributor, exit loads are imposed to discourage investors from exiting early. Although it helps to go for a fund that does not impose loads, do not select a fund based on its load structure. Look at the fund's past performance and its pedigree.

Minimum Investment

The amount you have set aside for investing in the mutual fund may be less than what the fund may allow. Find out the scheme's minimum investment limit. Different schemes of the same fund may have different minimum investment limits. A KIM will explain with figures what is the minimum initial application amount, minimum additional application amount and the minimum amount or number of units at redemption. It also provides the minimum investment for each instalment that you pay under a systematic investment plan initial application amount.

Instructions

Carefully read the instructions to fill the form. It will guide you about how to fill your application form, list of documents required, mode of payment, and other such details. It also provides information about how you would get the account statement (by email or post) and in case you have queries, how to approach the authorities concerned. It also tells you how to make and cancel nominations.

Whether you are a first-time investor or have been through the process of selecting or applying for an MF scheme before, a KIM is the key to use to open the doors to get inside a scheme.