Scheme Related Information — the documents behind the disclaimer

The line everyone hears and nobody reads

So what are the scheme related documents? The legal documents providing the information an investor requires are the Scheme Information Document (SID), the Statement of Additional Information (SAI) — together the "scheme related documents" — and the Key Information Memorandum (KIM).

And here is why it matters more than a disclaimer usually does.

Caveat emptor — let the buyer beware

Investments are governed by the principle of caveat emptor, "let the buyer beware". An investor is presumed to have read and understood the scheme related documents before investing.

This is not a moral point. It is a contractual one. The person signing the application form has legally accepted the terms of the offer. Therefore an investor cannot claim at a future date to have been unaware of a fact that was disclosed in the scheme related documents.

The mechanism is worth spelling out, because the exam tests it:

1. The units of the scheme are offered to the investor through the scheme related documents — that is the offer.
2. By signing the application form and making a payment, the investor accepts the offer.
3. By issuing units against that acceptance, the mutual fund completes the contract.

So the scheme related documents contain the information that forms the basis of the contractual relationship between the investor and the fund.

The two primary documents

It follows that a single SAI is relevant for all the schemes offered by a mutual fund — the constituents and the statutory apparatus do not change scheme by scheme.

A legal technicality worth knowing: in practice SID and SAI are two separate documents, though legally the SAI is part of the SID.

Who prescribes them, and who approves them

Two questions, two different answers, and NISM asks both.

Both documents are prepared in the format prescribed by SEBI and submitted to SEBI. The contents need to flow in the same sequence as in the prescribed format. The fund is permitted to add any other disclosure it feels is "material" for the investor.

Because investors are not sophisticated experts of finance or law, the documents must be written in simple language, and in a clear, concise and easy to understand style.

Now the part candidates get wrong:

If an option says a scheme has been "approved by SEBI", it is wrong.

Where to find them. Draft SID and SAI are public documents, available for viewing on SEBI's website. The final documents, after incorporating SEBI's observations, must be hosted on AMFI's website two days before the issue opens. Every mutual fund also provides them for download on its own website for all current schemes.

The Scheme Information Document

The SID sets forth the information about the scheme that a prospective investor ought to know before investing.

An SID remains effective until a "material change" occurs — other than a change in fundamental attributes and within the purview of the SID. After such a change, the changes are filed with SEBI and communicated to investors, or publicly notified by advertisements in the newspapers, subject to the applicable regulations.

The Statement of Additional Information — its six sections

Every mutual fund provides the SAI for download on its website. But investors have a right to ask for a printed copy of the SAI. Through the AMFI website, investors can access the SAI of all mutual funds.

The Key Information Memorandum

An investor is expected to read all the scheme related documents — but circulating them along with application forms is too difficult and costly, especially in printed form. So the KIM is mandatorily circulated along with the application form.

Key items in the KIM:

• Name of the AMC, Mutual Fund, Trustee, Fund Manager and scheme
• Dates of Issue Opening, Issue Closing and Re-opening for Sale and Re-purchase
• Investment Objective
• Asset allocation pattern of the scheme
• Risk profile of the scheme — a snapshot of the risk to the principal invested, the suitable investment horizon, and the type of securities the scheme will invest in
• Plans and Options
• Benchmark Index
• IDCW plan
• Performance of the scheme and the benchmark over the last 1 year, 3 years, 5 years and since inception
• Expenses of the scheme
• Information on registration of investor grievances

Addendum

SID, SAI and KIM are updated periodically. Interim changes are updated through an addendum. The addendum is considered to be part of the scheme related documents and must accompany the KIM.

Updation — the timetables

SID (open-ended and interval schemes)

• First update: within the next six months from the end of the 1st half or 2nd half of the financial year in which the scheme was launched, based on data as at the end of the previous month.
• Subsequently: within one month from the end of the half-year, based on data as at the end of September and March.

On a change in fundamental attributes (Regulation 18(15A)):

1. An addendum to the existing SID is issued and displayed on the AMC website immediately.
2. The SID is revised and updated immediately after completion of the duration of the exit option — which is not less than 30 days from the notice date.
3. A public notice is given in one English daily newspaper having nationwide circulation, as well as in a newspaper published in the language of the region where the Head Office of the mutual fund is situated.

For other changes:

1. The AMC issues an addendum and displays it on its website immediately.
2. The addendum is circulated to all distributors, brokers and Investor Service Centres so it can be attached to all KIMs and SIDs already in stock until they are updated.
3. The latest applicable addendum is part of the KIM and SID — for example, on a change in load structure, the addendum carrying the latest load structure is attached to stock copies.
4. Account statements continue to include the applicable load structure.

SAI

• Regular update by the end of 3 months of every financial year.
• Material changes are updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.

KIM

• Updated at least once in half-year, within one month from the end of the respective half-year, based on data as at the end of September and March.
• Filed with SEBI forthwith through electronic mode only.

What an existing investor gets — ongoing disclosures

Two things an existing investor needs to track: the current value of the investment, and where the scheme has invested.

The unit balance comes from the latest account statement; the NAV must be published.

Daily NAV disclosure. Each scheme's NAV must be disclosed at the end of each business day, published on the AMC's website and declared on AMFI's website every business day, within the time limit in the applicable guidelines.

But the frequency differs by scheme type, and this is examinable:

Scheme performance data for all mutual fund schemes is carried on the AMFI website.

Total Expense Ratio disclosure. The TER is one of the important factors that impact the scheme's NAV, so it must be visible.

• AMCs must prominently disclose the TER on a daily basis, scheme-wise and date-wise, for all schemes except infrastructure debt fund (IDF) schemes, under a separate head — "Total Expense Ratio of Mutual Fund Schemes" — on their website and on AMFI's website.
• Each item of expenditure accounting for more than 10% of total expenditure must be disclosed in the accounts or the notes to the schemes.
• Disclosure must be in a downloadable spreadsheet and a machine readable format.

Scheme-wise dashboard. Each AMC must publish a scheme performance dashboard on its website and update it regularly, showing how schemes have performed over various holding periods. Most AMCs allow it to be downloaded in tabular form. It contains: scheme name; scheme classification and category; type of scheme (open-ended or close-ended); investment objective; name of the fund manager; benchmark index including any additional benchmark; exit load and lock-in period; plans and options; minimum investment amount; month-end AUM; TER; scheme inception date; month-end portfolio; and scheme performance. It lets an investor easily compare schemes across the mutual fund.

Risk-o-meter. Mutual funds and AMCs must disclose the risk-o-meter of the scheme and of the benchmark while disclosing the performance of the scheme against the benchmark. It depicts the risk level associated with the scheme — not returns, not expenses, not holdings.

Portfolio disclosure. A list of the securities in which the corpus is currently invested, with the market value of those investments.

• Disclosed along with the ISIN, as on the last day of the month, on the AMC's website and AMFI's website, within 10 days from the close of each month, in a user-friendly and downloadable spreadsheet format.
• For debt schemes, disclosure is fortnightly, within 5 days of every fortnight.
• The yield of the instrument must also be disclosed, in addition to the current portfolio.

Financial results. Every mutual fund and AMC must host the unaudited financial results of their schemes on their website within one month from the close of each half-year ending 31 March and 30 September, in the format specified by SEBI. Written communication — including digital modes such as email or SMS — must be sent to unitholders about the availability of those results.

Annual report. The annual report or abridged summary must be hosted on the AMC's website and on AMFI's website, and sent by email to investors who have registered their email id, no later than four months from the date of closure of the relevant financial year (31 March). Investors who have not registered an email id have the option of receiving a physical copy of the annual report or an abridged summary. The AMC must display a functional link to the full scheme-wise annual reports prominently on its website.

Non-mandatory: the Fund Factsheet

The monthly Fund Factsheet is one of the most popular documents a mutual fund produces, used extensively by investors, fund distributors, fund rating agencies, research analysts and the media.

Here is the point the exam turns on: it is not a regulatory requirement to publish the monthly factsheet. It is a market practice followed by all fund houses on a voluntary basis, and it is part of AMFI's best practice guidelines, which is why AMCs publish it every month. But because it is a marketing and information document, various SEBI regulations on information disclosure apply to it.

What it contains:

• Basic information — inception date, corpus size (AUM), current NAV, benchmark, and a pictorial depiction of the fund's style of managing the fund
• Performance relative to the benchmark over different periods, along with benchmark returns, as required by SEBI's regulations
• SIP returns in the scheme
• Portfolio allocation to different sectors and securities — though some fund houses do not disclose the entire portfolio, only the top 10 holdings
• For equity schemes: security-wise and sector-wise allocation; some factsheets also disclose derivatives exposure; portfolio features such as price-earnings ratio (PE), Beta, standard deviation and Sharpe ratio
• For debt funds: the rating profile of the securities and a snapshot of exposure to various rating baskets, plus average maturity and duration
• Investment details — minimum investment amount, plans and options, loads and expenses, and systematic transaction facilities