Mutual fund (MF) schemes come with an array of benefits for the investors. Some of the many benefits investors can enjoy while investing in mutual fund schemes include transparency, daily net asset value (NAV) declaration (and hence market value of investments), liquidity, convenience and superior risk-adjusted returns.
In addition to the aforementioned benefits, regulations for the mutual fund schemes are also wide and all-encompassing, which seek to protect investor interests’ right from the start of their investment till the end of it. Here are five such regulations which are not only highly useful but are also something which every mutual fund investor should be aware of.
Riskometer: Every mutual fund scheme carries some level of risk. Generally, equity-oriented schemes are considered riskier and debt-oriented schemes less risky. Riskometer is a visual representation of the risk involved while investing in a scheme. The riskometer looks like a speedometer with five levels ranging from “principal being at low risk” at one end of spectrum to “principal at high risk” at the other end. All mutual funds have to mandatorily show the riskometer of each scheme in the scheme information document), key information document, fund factsheet and other important forms of communication including advertisements too. While allocating one’s investments and choosing a scheme, a balanced allocation between higher-risk and lower-risk funds, is desirable.
Direct and regular plans: Many investors are not aware that as per regulations, every mutual fund scheme should offer a direct and regular plan to the investor. The difference is that direct plans are for investors who wish to make direct investments i.e. not routed through a broker or a distributor. Direct plans have a separate net asset value, even though the portfolio of the mutual fund scheme is common. Such plans carry lower expense ratio owing to the fact that no commission expenses are charged on such a plan. Nowadays, making your investments online has been made easier by most of the asset management companies.
Maturity caps in various debt funds: In an effort to ensure that the mutual fund schemes are true to the label as per the investment objectives laid down, the mutual funds regulator Association of Mutual Funds in India (Amfi) also specifies maturity caps at times for certain class of debt schemes. The maturity cap can be at a portfolio/scheme level or even for specific debt instruments. For example - Liquid schemes cannot invest in any debt or money market instruments that have more than 91 days of maturity. Fixed maturity plans cannot invest in debt or money market instruments whose maturity date is beyond the maturity date of the scheme. A simple rule of thumb which can be followed is schemes with lower average maturity or duration, carry lower interest rate risk and schemes that entail a mandate to run higher average maturity/duration, carry higher interest rate risk. Thus, knowing the maturity profile of the debt- oriented scheme which you plan to invest in, can be useful to know the risk that the scheme carries.
Key information document (KIM): Key information document is an abridged or shortened version of the scheme’s offer document which gives all important details pertaining to that scheme like investment objective, asset allocation pattern, benchmark of scheme, etc. It’s useful to refer to this before making investment in a scheme for the first time. All mutual funds upload the key information document on their website for easy access by the investors.
Selection of advisor/distributor: You should ensure that your distributor is Association of Mutual Funds in India (Amfi)-registered and that the distributor has a valid Amfi registration number (ARN). One can also verify the details of a distributor from Amfi website. At this link you will also find a list of suspended or terminated advisors.
A few checks and balances are important before one begins investing to ensure scheme selection is appropriate and it helps in meeting your investment goals as well as to ensure the process is hassle free. Happy investing!
As an investor, you are advised to conduct your own verification and consult your own financial and tax advisor before investing.
FULLY AWARE
- Checks and balances before investing will ensure right scheme selection
- Conduct your own verification and take advice for tax, other financial plans
The writer is head – fixed income, Principal Pnb Asset Management Company
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