Mutual funds are a great start to building a diversified portfolio. Want to know more about mutual funds? Enroll in: NSE Academy Certified Financial Planning & Wealth Management course on Elearnmarkets.
In most of the advertisements for mutual funds, you will find the following disclaimer stating that
“Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.”
This offer document mentioned above is no less than a 100-page booklet.
Moreover, the font size of the terms and conditions page disappoints the prospective investor from even making an effort to read 1000 plus word thesis.
Few of the prospective investors either read the headings or may just blindly sign the offer document without paying much heed to the entire reading bit.
To find out in which type of mutual fund you should invest in, you can download Kredent Money App.
Often we get ourselves into trouble by not reading the terms & conditions mentioned in the offer document and later on crib about the surprising terms that we may come to know through our mutual fund managers.
In this article, we have tried to brief you on a few points which are mandatory for you to know before signing the offer document.
What is an offer document?
An offer document is a prospectus which contains useful information for the prospective mutual fund investors.
This document contains an application form, investment objectives of the mutual fund, past performance and other related financial information with respect to the mutual fund.
You can avail a copy of the offer document from the fund advisor himself or can view it on the website of the respective mutual fund company.
Also, refer to the latest offer document and check with your mutual fund advisor or financial planner.
Read More: How To Become Your Own Financial Planner?
Now, once you know what offer document offers, you must also know the other important terms & conditions, as mentioned below:
Read the investment terms carefully in the offer document, both the minimum investment requirement and the investment objective of the mutual fund.
Mutual funds differ from the minimum initial investment ranging from Rs. 500 to Rs. 10 crores depending upon the investment objective of the mutual fund.
The prospective investor should try to match the income or capital appreciations of the fund along with your own expectations.
The clause on Risk:
This is one of the most crucial aspects to be read while reading the offer document.
On the basis of your own risk appetite, the prospective mutual fund investor may choose the scheme that would fit into their requirements.
As aforesaid mutual funds are subject to market risk and this risk depends on the kind of investment objective of the mutual fund.
The risk associated with the mutual fund is clearly mentioned in the offer document for the investor’s reference.
Also Read Mutual Funds risk- you may not know
Always remember that the mutual funds are not just to make money for you, but also for themselves via the fee or the commission charged in the due course.
The fee charged consists of annual recurring expenses, management fee, servicing costs, commission etc. that add up to the total costs.
A prudent investor should thoroughly check the fee component bit in the offer document and then proceed with the other term as mentioned herein.
As discussed in our previous articles, mutual funds provide us with a substantial bag of tax savings.
Apart from the returns, mutual funds offer, the dividend income received is subjected to tax exemptions under the Income Tax Act, 1961.
A fine reading of this clause helps the investors to plan their income tax return in the best possible manner.
Other Investor Services:
This clause is found at the back of the offer document wherein the other investor services pertaining to the dividend reinvestment scheme, systematic plan, withdrawal plan are provided for the knowledge of the investors.
A prospective investor should give a thorough reading of this clause to decide on the additional advantages that can be received after investing in the mutual funds.
Most of the prospective investors are dependent on the financial advisors to seek a brief on the various mutual fund schemes.
However, as said before remember to a quick reading of the pointers as mentioned above which will help you understand the basis of the scheme that you are going to invest into.
This snippet of information about the mutual fund offer document is a humble effort on our part to help you know the most important points that are a must for the mutual fund prospective investor.
Hope this article guides you to act as your own financial planner.