Why read the offer document while zeroing in on a mutual fund scheme

What's an offer document? It is one of the most important sources of information regarding the fundamental and other attributes of a mutual fund and is issued by the asset management company (AMC). It solicits prospective investors and serves the same purpose as a prospectus that is issued by companies in the primary capital market. 

The offer document of a closed-ended fund is brought out only once at the time of issuance as no new units are sold to investors after the offer period. However, the offer document of an open-ended fund is valid for all times as the fund can issue and redeem units on a regular basis. This information helps investors choose a mutual fund that matches their requirements. Let us look at some of the important points covered in the offer document. 

Investment objectives and policies: This section lists the asset allocation pattern and diversification policy of the fund. The former reflects the flexibility of the fund in terms of rebalancing its portfolio (equity, debt, money market, cash) so as to benefit from market movements. The diversification policy determines the kind of sectors or stocks (large-, mid-, or small-cap, value stocks, growth stocks) in which the fund will invest. The investment objective of the fund must coincide with that of the investor and, hence, one should analyse it before buying into one. 

Risk profile: The offer document must make investors aware of the risk factors, which can be standard or specific. The former are governed by market movements, whereas scheme-specific factors are due to the fund's investment strategies like lock-in period (closed-ended) and limited diversification. For example, closed-ended sectoral funds exhibit high risk as their investment portfolio comprises stocks from the same industry. Such factors can significantly affect the investor's choice and need to be evaluated. 

Fund expenses: This section contains information on the estimated expenses, which include recurring expenses, initial issue expenses, loads, etc. If there is a variation in the estimated expenses for the scheme and actual expenses for similar schemes in the past, the reasons should be clearly explained. This information can help determine the costs involved in investments and should be scrutinised as these can significantly affect the returns over the long term.

NAV and valuation: This section explains the valuation norms of assets and frequency of disclosure of NAV. Generally, open-ended funds calculate and declare NAVs daily. The valuation norms are critical for funds that trade heavily in non-traded securities as it affects the NAVs significantly.

Procedure for redemption or repurchase: It explains how to determine the redemption and repurchase price of units and lists the centres where investors can redeem their units.

Redressal mechanism: This section helps investors judge the operational efficiency of fund management. The name of the person to approach for queries, complaints, or redressal of grievances is mentioned.

Investor's rights: The offer document lists the rights and obligations of investors with respect to the scheme's assets, management, AMC and other constituents. 

The offer document is the primary vehicle for the investment decision. It acts as a legal document that protects and governs the right of the investors to information.