Let’s begin by understanding the constitution of a Mutual Fund. The following entities make up a Mutual fund:
The Sponsor of the fund creates a mutual fund trust and sets up the AMC. The sponsor also makes an application for registration of the mutual fund and contributes at least 40% of the net worth of the AMC. The trustees are selected by the sponsor too. The trustees oversee the running of the AMC and ensure compliance with SEBI’s norms. The sponsor or the trustees appoint the AMC who do the management of funds (buying and selling of securities). The custodian keeps an account of all the investments of the Mutual Fund. The RTA maintains a record of the investors and their holdings while constantly updating post buying and selling of units.
For an investor, the process of investment starts with defining the investment objective, assessing the risk preference and determining the time window of investment. Once this is done, the investor starts looking at investment options that match the objective, risk and time preference. Post narrowing down on a few schemes he checks the scheme related documents as explained below:
The [KIM] [SID] [SAI] of Mutual Funds
One statement that all mutual fund advertisements keep repeating is – ‘Mutual Fund investments are subject to market risks, read all scheme related documents carefully’ What are these ‘scheme related documents’?
As mandated by SEBI, each AMC needs to provide three important documents to inform investors about every scheme:
Scheme Information Document (SID) - It carries important information about the scheme which can help an investor make an informed decision about the scheme. The information includes:
Statement of Additional Information (SAI) – As defined by SEBI, the SAI contains details of the Mutual Fund, its constitution and certain tax, legal and general information.
Key Information Memorandum (KIM) – A KIM is nothing but a summarized version of the SID and SAI. It contains all the information that is absolutely necessary for the investor to know before investing and has been mandated by SEBI.
After assessing and analyzing these documents, he finally chooses the scheme that he wants to invest in. The mutual fund units can be purchased through any of these options:
The investor is also expected to select one of the three options when filling an investment form:
Investors can choose one of these options,as available, to match their investment objectives. However, it is also advisable to consider the tax implications of each of these options before selecting them.