How to Stay Awake while Reading a Mutual Fund Offer Document

“Mutual fund investments are subject to market risk. Please read the offer documents carefully before investing”.

Does this sound familiar? It should, because it’s said really fast and you have heard it a thousand times on the TV, the radio or even read it with every mutual fund ad. The question we will tackle today is what this line actually mean.

They are talking about the scheme information document (SID), which gives you fair warning about the fund you plan to invest in, and how they work. But an offer document can be quite lengthy and confusing. You wouldn’t even know where to start.

To help you make sense of it all, here are 5 things you need to look at when going through a SID.

1. Product Labeling: This could be the single most important part of the document because it decides how much you sweat once you invest. This is the part that tells you what type of a fund this is; open-ended, close ended, blue chip etc., and the risk rating of the particular fund, which ranges from low to high.
2. Highlights/Summary Of The Scheme(S): This is the part that details the scheme’s objective, the ideal investor for it and also, what you might have to pay to invest or withdraw from the scheme, a.k.a. entry and exit loads.
3. Introduction – Part A: This can also be called the doom and gloom section since it’s the part that details all the risks that are involved in investing in a mutual fund. It will tell you about the standard risks involved, and then about the scheme specific risks. Basically, if you don’t want to sweat after investing, you better read this more thoroughly than Harry Potter books.
4. Introduction – Parts D and E: Now, if you don’t speak mutual fund then these are the sections that teach you how to sound like a mutual fund pundit. This is where you will find the definitions of all the fancy terms you have been seeing sprinkled across the scheme information document. It will also teach you the various abbreviations used in the documents.
5. Information about The Scheme(S): This entire section is an important one because it is the one that will tell you how the assets (the money in the mutual fund) will be invested.

In addition to this you should also know that these documents are updated regularly by the companies and are available online. They also don’t publish individual scheme information documents,  but a compilation of all the schemes on offer. If you are serious about your research into a particular mutual fund, you should also consider looking into the fund fact sheets to see the past performance and a detailed breakup of the investments.

Still awake? AWESOME, it means you are victorious and your reward is a smarter you, especially when it comes to investing in mutual funds.

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