LOOKING THROUGH THE OFFER DOCUMENT

LOOKING THROUGH THE OFFER DOCUMENT

The offer document is the most important part of a mutual fund scheme offering. The offer document is the base upon which then entire structure of a mutual fund is set up and then the scheme is run according to it. There cannot be anything or any activity outside of the offer document that can be undertaken by a mutual fund. The offer document lays down the whole list of things that the fund will undertake and has all the details necessary for the investor to make a decision regarding the purchase of units in the scheme. In effect every investor is supposed to read the offer document before making an investment in the scheme but hardly anyone even refers to the offer document.

The offer document will on the whole contain the following things. Some funds might show them a bit separately but these are the things that one will see in most of the fund offerings in one way or the other.

HIGHLIGHTS

This is the opening part of the offer document where the entire details of the scheme are mentioned upfront so that by a quick glance the investor can get some details of the scheme. In most cases this will include the details about the mutual fund so that investors are able to go through the history of the fund and its track record. Then there are details about the scheme, where it will invest, what will be the liquidity in the scheme along with the load structure and the taxation issues. It is also likely that investors will be informed that they are not being offered any guaranteed or assured returns as these are prohibited under the regulations


DEFINITION

This section contains the definitions of the various terms that will be used in the offer document which can include terms like NAV, registrar, Custodian and even terms like dividend, units, where the meaning of these terms are explained

RISK FACTORS

This is one of the most important parts of the offer documents because it entails what are the risks involved in the scheme. Reading through this will give the investors a clear idea about how a downside can come about in the fund that will affect their investment. Some of the risk factors are standard risk factors, which means that these will be present for most schemes. The ones here would include something like the point that the NAV of the scheme can go up or down depending upon the performance of the scheme. Similarly the point that past performance is no guarantee of the future will be highlighted here along with some other ones, which could include one that says that the name of the scheme does not indicate the quality of the scheme or its future prospects or returns. Many investors make these mistakes but they are clearly warned against this in the offer document itself.

Then there are scheme specific risk factors, which arise due to the fact that the nature of the scheme will give rise to the risk. Thus it will be different when it is an equity scheme and when it is a debt scheme like a gilt scheme. Even within the equity scheme category there will be different risks for a diversified equity fund and even a sectoral scheme. In addition to all this there can be an additional head of special considerations which are additional risks that will be arising on account of the reason that there might be derivative products used in the scheme or even because of securities lending that is used for the purpose of carrying on t he investments in the scheme.

SCHEME SUMMARY

The scheme summary has various details that will be useful for the individual investor. This will include the structure of the fund plus the offer price that will be applicable for the investor both at the time of the initial offer as well as subsequent purchase and sale of units. The investment objective of the scheme will be explained and the various options for investors also listed out. The minimum and maximum application amounts will help the investor in knowing the figures in which investments have to be made both at the time of the initial offer and the subsequent purchase and sale. Initial issue expenses along with the load and the liquidity aspect will also be mentioned here.

FUND DETAILS

There will be an entire section that is devoted to the various details of the fund that for investors would be of academic interest but is still worth knowing. The constitution of the mutual fund will be mentioned along with the sponsor of the fund, the details about the board of trustees, the trusteeship fees and the substantive provisions of the Trust deed. Then comes the part of the investment manager of the funds and the board of directors of the asset management company, the powers and duties of the AMC and the asset management fees. Once this is known it is time to get a little more specific which is in terms of the key employees of the AMC and their related experience and the fund manager for the scheme. The rest of the details will be about the custodian, registrar and transfer agents, fund accountant, auditors and the collecting bankers.

INVESTMENT DETAILS

The next section or part of the offer document will be based on the investment of the scheme. This will start with the investment objectives and polices of the scheme, which consists of the fundamental attributes of the scheme. This covers the type of scheme along with investment objective and the investment pattern. The investment pattern and the ability to change this pattern will determine the way in which the funds of the scheme are invested. This will mean that the allocation across various asset classes permitted by the scheme will be given. There will also be a mention as to when the investment pattern of the scheme can be changed.

Another important point that one has to look out for in the details is the time after which the portfolio of the scheme will be disclosed in full to the investors and the liquidity that the fund will have for the investors to sell their units and convert their investment into cash. There will also be a part about the fees and expenses of the scheme where there will be details about the initial expenses and also the recurring expenses. These areas will mention the upper limit for the expenses and the actual will be known only later but it cannot exceed this figure.

There will also be a clear outline about the investment approach of the fund manager and the way in which they propose to control the risks in the scheme. The procedure that will be followed for the investment decisions will be listed and there will be a mention of the portfolio turnover. In case there are any changes to the fundamental attributes to the scheme it will be detailed as to how this will be possible. The valuation parameters used for various types of investment in the scheme will also be mentioned along with the way in which the NAV of the scheme is calculated.

There are two other important areas that cannot be missed out because this determines the way in which the NAV is reflected. The first is the accounting policies and standards that are followed by the scheme. These have to be clearly laid down which will be followed under all cases and there will also be a note of the guidelines for the identification and the provisioning for non-performing assets in the scheme

THE INVESTOR SECTION

There is another section, which is the most useful area for investors as it deals with details that they are interested in. One has to note that several things in the entire offer document will be repeated and hence that should not be taken as a surprise. In this sector there will be general information on the units and the initial offer. The initial offer period and the initial offer price will be clearly laid out and details about the extension of the initial offer period and the minimum amount of subscription for the scheme.

For investors the minimum amount that they have to pay on application and the allotment and refund guidelines will be given. The option for the investors to choose from will be listed and then those who can invest in the scheme will be specified. The process of application will be laid out along with details of the switch, sale and repurchase of units on an ongoing basis. The details about the account statements will be given and the position of joint applications laid down. Then there will be additional information on transfer and transmission of units, folio details, fractional units and the right of the scheme to limit redemptions. Further suspension of sale or switch of units conditions will also be mentioned along with the position for NRI/OBC and FII investments in the scheme.

EXPENSES

This part covers the load structure and the recurring expenses of the scheme. First the loads charged along with the maximum amounts of the loads that can be charged by the scheme are given. This is accompanies by the expected initial issue expenses and the recurring expenses of the scheme. There will also be exhaustive details of condensed financial information about the schemes already launched by the fund

UNIT HOLDERS RIGHTS

There are several services that are offered to the unit holders for their ease of operations. This will relate to the areas of account statements and even receiving various communications from the fund in the form of emails. It will also be mentioned as to where the NAV of the scheme can be contained and at what time. Further mutual funds now allow online access of the holdings of the investor and for this the personal identification number and the login and password details as to how these are to be obtained will be mentioned. The rights of the unit holders of the scheme will be laid out along with the point as to how the scheme can be wound up and the procedure that has to be followed for winding up.

There is another area where investors will be very interested and this is about the tax effect on the scheme. Here the various tax benefits that are available to the investors will be explained in detail under their various heads

OTHER ITEMS

There is one final area where a lot of miscellaneous details can be found. The mechanism for the redressal of the grievances of the unit holders will be mentioned along with the mention of different information. This will include stuff like the position of the investor complaints received by the fund and the associate transactions that have taken place with the various entities within the fund. Further details about dealings with associate companies will be given and so will the disclosure about the investments made by the schemes of the fund in companies or their subsidiaries that have invested more than a specified figure of the net assets of any scheme.

Details about dividends and their distribution along with the pending litigations, borrowing by the mutual fund and inter scheme transfers will be present. Further there will be a list of documents that will be available for inspection that will be given