Why Mutual Fund SIDs are Essential Reading

As per SEBI’s MF Regulations¹, every AMC (Asset Management Company) must release an Offer Document (OD) for every mutual fund scheme it launches. The OD is divided into a SID (Scheme Information Document) and a SAI (Statement of Additional Information). Of these two documents, the SID is more valuable when analysing a mutual fund scheme.

• AMCs are required to file a draft SID with SEBI before launching mutual fund schemes
• In case of inaccuracies, SEBI will return the SID to the AMC
• After making the appropriate changes, a final SID is submitted to the Board before it is issued for circulation
• The SID is updated at regular intervals (roughly every 6 months) to include all the latest changes

The final approved SID and other offer documents for every mutual fund scheme can be found on the official website of AMCs and on the SEBI website.

Why should you read the SID?
The SID is a critical source of information for any mutual fund research, because:

• Attributes such as the scheme objective and asset allocation pattern can help you better understand the intent and investment strategy behind the scheme.
• Risk factors can be analysed to confirm whether the scheme fits within your risk appetite.
• Details about the fund managers help investors learn more about the experience and abilities of the people responsible for managing the scheme.
• Information about loads, fees and expense ratios provides a clear idea about the investment expenses involved.
• Past performance and benchmark details can assist investors in mutual fund analysis (although past performance is not a guarantee of future success).

What does a SID include?
Here are some of the most important details included in the SID:

• Riskometer
  In 2015, SEBI introduced new guidelines² for labelling mutual fund schemes as per their risk profile. Among the new elements is the ‘Riskometer’, a pictorial representation of the level of risk to help investors understand risk easier. The 6 risk levels are Low, Low to Moderate, Moderate, Moderately High, High and Very High.
  
  
• AMC-related Information
  You can find details such as AMC Name, Mutual Fund Scheme Name, Addresses, Trustee Company Name and Official Website Address at the beginning of each SID.
  
  
• Investment Objective
  There will be detailed information about the investment objective and how the fund managers intend to achieve it. In case of any changes to the scheme's investment objective, AMCs are mandatorily required to update this section.
  
  
• Asset Allocation
  This section provides information about how funds will be distributed across asset classes. Based on the asset allocation strategy, mutual fund schemes are broadly categorised as equity funds, debt funds and hybrid funds
  
  
• Benchmark Index
  Every mutual fund scheme, whether equity funds, debt funds, or hybrid funds, is structured on the basis of a benchmark. For instance, equity funds with Nifty 50 as their benchmark index will have a structure similar to that of Nifty 50.
  
  In fact, according to new SEBI rules issued in October 2021³, some mutual fund categories will have to follow a two-tier benchmarking framework from January 1, 2022. While the first-tier benchmark will reflect the category of the scheme, the second-tier benchmark will reflect its investment style. This is intended to help investors make a more informed decision.
  
  
• Investment Strategy
  This section will explain the investment style or approach of the fund house while selecting securities. Analysing the investment strategy can provide great insight into the processes and systems an AMC follows.
  
  
• Fund Manager Details
  Information regarding the fund manager handling the scheme can be found in this section. You should carefully review their qualifications, track record and experience to help gauge their performance.
  
  
• Risk Factors
  Even the safest mutual funds carry some level of risk. This section offers a thorough examination of all possible risk factors to help investors confirm whether the scheme suits their risk profile.
  
  
• Past Performance
  The past performance of the scheme is regularly updated in the SID. This offers a rough gauge of the scheme’s potential going forward, though it is important to remember that past performance does not necessarily guarantee future returns.
  
  
• Fees and Expenses
  AMCs levy charges such as fund management fees, loads etc. in return for their services. You may want to review these charges to ensure they are transparent and reasonable.
  
  
• Investment Options
  Most schemes are available in two versions – (1) Growth and (2) Income Distribution cum Capital Withdrawal (IDCW) Option. This section clarifies the scheme version and available investment options like lump sum investment, SIP scheme, STP scheme and more.

Other important scheme-related information documents:
As important as the SID is, it’s not the only document you should review before investing. Here are some of the other scheme-related documents that deserve your attention:

1. SAI (Statement of Additional Information)
   SAI includes further information about the mutual fund scheme, such as the fund’s Constitution, Sponsor, Trustee, AMC, Service Providers, Rights of Unitholders, Taxation etc.
2. KIM (Key Information Memorandum)
   KIM is a condensed version of the SID. It is attached to the scheme application form and summarises the key information that you should know before making a mutual fund investment.

Choosing the best mutual fund scheme:
Ultimately, you should thoroughly review all the available information when choosing the mutual fund to invest in 2022. Scheme-related documents like SID, SAI and KIM are a valuable source of information. These documents will help you analyse the quality, credibility and safety of each mutual fund scheme, and the AMC behind it, and help you make more informed decisions as an investor.

Sources:
1. https://www.sebi.gov.in/sebi_data/attachdocs/1337083696184.pdf
2. https://www.sebi.gov.in/legal/circulars/apr-2015/product-labeling-in-mutual-funds_29702.html
3. https://www.sebi.gov.in/legal/circulars/oct-2021/guiding-principles-for-bringing-uniformity-in-benchmarks-of-mutual-fund-schemes_53539.html