What's on offer?

An offer document is one of the most important sources of information concerning the key attributes of a mutual fund. Issued by the fund AMC, it serves as a prospectus and helps investors choose the fund that matches their investment goals. The offer document of a closed-ended fund is released only at the time of issuance as no new units are sold after the offer period. On the other hand, the offer document of an openended mutual fund is valid for all times as a fund can issue and redeem units on a regular basis. As per Sebi regulations, a mutual fund must revise its offer document at least once every two years. Since it acts as a legal document that protects and governs the investors’ right to information, they must read the offer document thoroughly before investing. Here are the key aspects that it covers:

Investment objectives and policies: This section lists the fund’s asset allocation pattern and diversification policy. The former shows the flexibility of a fund in terms of re-balancing its portfolio (equity, debt, money market, cash) to benefit from the market movements. The latter determines the sectors (infrastructure, banking, etc) or stocks (large-, mid-, small-cap, value stocks, growth stocks) in which the fund will invest. It’s important to analyse this section to ensure that the investment objective of the fund coincides with the investor’s goals.

Risk profile: The offer document must make the investors aware of the risk factors, standard or specific. While the standard risk factors are governed by market movements, the scheme-specific risks are due to investment strategies like lock-in periods (closed-ended) and limited diversification. For example, closed-ended sector funds exhibit high risk as their investment portfolio comprises stocks from the same industry.

Fund expenses: This information helps investors determine the costs involved in investments and is important as these affect the returns in the long run. These include recurring expenses, initial issue expenses, loads, etc. If there are adverse variations in the estimated expenses for the scheme on offer and the actual expenses for similar schemes in the past, the reasons should be explained.

NAV and valuation: This section explains the valuation norms of assets and the frequency of disclosure of NAV. While the open-ended funds are required to calculate and declare the NAVs daily, the closed-ended funds must do so every Wednesday. The valuation norms are critical for funds that trade heavily in nontraded securities as it affects the NAVs significantly.

Procedure for redemption /repurchase: The document describes how to determine the redemption and repurchase price of units and lists the centres where the units can be redeemed.

Redressal mechanism: This information helps judge the operational efficiency of the fund management. It lists investors’ complaints for the past three fiscal years for the existing schemes and their redressal mechanism.

Investor rights: Being the schemes’ owners, the investors should be aware of their rights with respect to its assets, management, AMC and other constituents, and the offer document lists these.

Money Today analyses new fund offers. For details, read ‘Money Today-Plexus Management new fund evaluation’.

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