It is said that Mutual fund investments are subject to market risks and it is required to read the offer document carefully before investing. All that is very well but sailors are not market minded people, I mean we are trained for a different line of work. The technical words used in the offer document are like gibberish to use.
In this article, I will discuss the 10 points one should read to get a fairly clear idea of what the Mutual Fund is all about and whether to go ahead and invest in it or not.
One must know what our goals are, for which we are making the investment. After analysing the fund based on the below mention pointers, if it falls in line with your needs that you should definitely go ahead and invest in it.
You do not need to read the entire 200-page long document to understand the nature and goals of the fund. A KIM or Key Information Memorandum is issued along with each fund which contains all the important points regarding the said mutual fund.
The first thing to do is to note the edition of the OD (Offer Document). You need to know that the information which you are reading and trying to understand is the latest one.
What does the fund intend to achieve? Is it long term capital gains, or tax savings, or regulated income, retirement planning. Exactly what is it that it wants to achieve in the end. If these goals match your own, then you are at the right place.
Some funds having a minimum investment limit, below which you cannot invest in that fund. This is done to achieve a sizable capital to invest in the market.
Mutual fund do have certain risks associated with them just like any other investment instrument. SEBI have defined particular color codes to mutual funds, which the AMCs have to comply with to make the customer’s job easier. It is much easier to identify which funds have a higher risk factor and so on. It is important to note that a higher risk factor also means that the potential returns could also be higher. Both are directly proportional.
The key is to know whether the said risk is in line with your risk appetite.
You are giving your hard earned money to the fund manager, so it is your duty and right to know what the fund manager would be doing with it. OD shows where all the fund intends to invest, these investments could be in debt or equity stocks, other Mutual Funds, Bonds or cash even. You should ensure that the fund has adequate diversification in its portfolio unless it’s a sector fund. In that case, it becomes a bit tricky.
Asset Management Companies are doing all the work for you while you are at sea. They are not doing it for free, obviously, they would charge you a certain amount for the services they offer. These charges vary from fund to fund. So one needs to know clearly, how much would that charge be. There are plenty terms and terminologies like Exit loads, Entry loads, switching charge, management fees, expense ratio etc.
The data provided by the companies is generally cumulative of the previous years performances. Certain acceptable formulae are applied and on their basis, they obtain some numbers. Too much to understand, in simple words, one should check how the fund has performed in the past few years.
Some questions that come to mind:
Note: Most of the figures displayed in the previous years are BEFORE TAX. In order to depict a merry picture, this is a common practice. You need to ask whether the figures are Pre or Post-Tax.
Mutual funds are having a substantial tax benefit under the current laws, to be more precise under Section 23D and Section 115. One must read that area carefully to know the tax part of your returns.
Note: Equity Funds do not have long-term capital gains tax and dividend distribution tax.
The profile of the fund manager should be carefully evaluated. Normally their entire professional career chart is updated on the AMC website for the investors to see. This gives a fair idea of the capabilities of the managing team to the customer.
If a fund has had many fund managers, you need to know if the current manager is aptly qualified to handle the portfolio.
The fund normally offers services like free switches or auto reinvestment of dividend etc. These services and their charges should be known to you as an investor.
So check for these 10 points while evaluating any Mutual fund, and I am sure you would make the right choice. Happy Investing !!