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On 1st November 2023, to boost the transparency of mutual funds offer documents (OD), the Securities and Exchange Board of India (Sebi) decided to simplify and rationalise the format of Scheme Information Document (SID).

The new format will be implemented from this year on 1st April 2024. Every mutual fund scheme contains three key documents with critical information about the scheme. The Asset Management Company (AMC) prepares these documents, and the SEBI approves them.

Before making investment decisions, investors and advisors should carefully read these documents in order to understand the risk characteristics and other scheme elements. The three documents are SID, Statement of Additional Information (SAI), and Key Information Memorandum (KIM). The Offer Document (OD) are available on the websites of all asset management companies (AMCs).

Let’s understand what offer documents are and why it is essential for investors to understand them before investing in any mutual fund schemes.

Scheme Information Document: 

SID provides basic information about a particular scheme, like Investment Objectives and Policies, Asset Allocation Patterns, fees, and Liquidity Provisions.

It includes scheme details like load, plans and options, past performance, benchmark, risk factors, fund manager details, and risk mitigation mechanisms. One can find SID available on the AMC website.

Statement of Additional Information: 

The SAI gives information on the mutual fund’s legal framework. It includes its formation, registration information, and organisational structure.

It includes the constitution of the Mutual Funds – Sponsors, Asset Management Company and Trustees. Also, it gives information on key personnel of the AMC and associates, such as Registrars, Custodians, Bankers, Auditors, and Legal Counsel. Further, it also provides information related to present financial and legal issues.

Key Information Memorandum: 

KIM is nothing but a concise version of SID is the KIM, which is attached to the application form.

As the name suggests, it contains all the Key Information an investor must know before investing in the scheme.

The KIM must be made available with every application form. KIM also includes the summary of SID and SAI.

Sebi simplifies the format of offer documents of mutual fund schemes

As per new modifications in the SID, the scheme’s portfolio holdings (top 10 holdings by issuer and fund allocation towards various sectors) shall be disclosed through a functional web link where the data shall be linked.

Also, under the SID, AMCs shall disclose the risk-o-meter of the Benchmark on the front page of the initial offering application form, Scheme Information Documents (SID), and Key Information Memorandum (KIM) and also, in a common application form – along with the information about the scheme.

Also, the AMC’s Board of Directors and b) Other key personnel shall disclose the total amount invested in the scheme.

Importance of offer documents to the investors:

The Offer Documents (ODs) explain a scheme’s investment objectives and intentions, which investors should be informed of before investing. They should also evaluate the scheme’s prior performance, total AUM, and date of inception.

The ‘Offer Documents,’ which detail market risks and the procedure for mitigating them, discuss risk factors and mitigation measures. Mutual fund houses are legally obligated to disclose all financial hazards, but investors should also be aware of these risks.

Conclusion

Investors are often satisfied by the fact that they will get a double-digit return, and by assuming so, they forgo reading offer documents. However, by reading documents in the first place, many investors’ financial blunders can be avoided.