A mutual fund prospectus is an offer document issued at the time of new issue of mutual funds, as an invitation to the public to subscribe to the units of a particular scheme. It contains the key information about the terms, conditions and the features of the mutual fund schemes and the application form. All mutual funds are required to give information about their schemes as per the format of the offer document prescribed by SEBI. Everyone agrees that the prospectus is the single best source of information about a mutual fund, yet as many of mutual fund investors do not use this critical document when investing their savings and retirement assets. The reason being the prospectus contains more information and is full of detailed information and uses complex terminology. As the minimum, an understanding of the following important aspects is necessary:
- Highlights of the Scheme: The main features of the scheme like the sponsor, quality of service and benefits are included.
- Risk Factors: Some of the risk factors are standard in nature. For example, mutual -funds and securities investments are subject to market risks and there can be no assurance that the scheme objectives will be achieved. Hence such risks cannot be avoided- However some risks are specific in nature arising due to investment objective of investment strategy and the pattern of asset allocation of the scheme. For example, the AMC may choose to invest in unlisted securities that offer attractive yields. But this may increase the risk of the scheme’s portfolio. A proper analysis of such risks is important before making investment.
- Annual Accounts: A straight forward reading of a mutual fund’s annual accounts provides an understanding of how each scheme has fared that year. The seemingly inoffensive notes attached to the annual accounts of mutual fund scheme may hide several litigation’s involved.
- Summary of Expenses: These expenses include the advertisement expenses, commission to agents/brokers, Registrars’ expenses, printing and marketing expenses, postage and miscellaneous expenses, banker’s fees, legal fees. These expenses are charged at the time of the initial issue and sale and repurchase of units of the scheme.