I often get confused when I have to make quick decision based on advice from my financial advisor or an exciting advertisement. Everyone tells that you should read the document before investing. To me, all offer documents looks alike. Can you give some pointers about what is it that I should look for in the offer document before investing?
Ashish Mirchandani
The prospectus or the offer document is your guide to the nuts and bolts of a mutual fund. It outlines all the information you need to make a decision about whether or not to purchase the fund. Here are a few of the key areas that you need to read.
Investment Objective: This is what the fund does with its assets. A fund's name is not always a clear indication of its strategy, but in this section you will get more details. Does the fund invest in stocks, bonds, or a combination of both? It will also tell you whether it will invest in large-cap stocks, mid-cap or both; and whether a fund is diversified etc.
Investment Pattern/Strategy: This section gives you details on the asset allocation of the fund, like how much it will invest in equity or debt. If it is an equity fund, then it tells you how much will be invested in large-cap and mid-cap, or the maximum exposure it will take in a particular sector. If it's a debt fund, the prospectus will have details on the allocation between corporate bonds and government securities, and what its maturity profile will be under normal circumstances. Hybrid funds of various kinds increasingly have complex asset allocation models that need to be studied carefully.
Fees, Expenses and Load: Don't skip this section—it is one of the most important parts of the prospectus. Does the fund have a load or is it a no-load fund? What are the operating expenses charged by the fund? Are there any fees or charges for withdrawing your money?
Performance Highlights: This section is only valid if it's an old fund. This table displays the return, total assets and NAVs of the fund. Performance highlights also include any dividends the fund has paid. This information will be an indicator as to how it has performed over the long run. But you do have to always remember that past performance is not a guarantee of future performance.
Fund Mechanics: The prospectus also spells out the methods of purchasing, redeeming and making additional investments. What is the minimum initial investment? These policies vary from fund to fund, so be sure to read through the prospectus carefully.
The fund prospectus includes a great deal of valuable information. You should at least go through these before investing in the fund that's just right for you.
This article was originally published on December 03, 2003.
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