Every mutual fund advertisement ends with the same sentence, asking you to read all scheme related documents carefully. Few investors do, mainly because nobody tells them which documents are meant or where to start. This guide covers the riskometer first, because it is the quickest signal, and then the three documents behind it.
What the riskometer is
The riskometer is a dial that every mutual fund scheme must display. It places the scheme on one of six levels of risk:
- Low
- Low to Moderate
- Moderate
- Moderately High
- High
- Very High
You will find it in the scheme documents, in advertisements, on the fund house’s website and in your account statement.
How to read it
The level is not a label chosen by the marketing team. It is worked out from what the scheme holds, using a method set by SEBI that looks at factors such as the volatility and liquidity of equity holdings and the credit quality and interest-rate sensitivity of debt holdings. Fund houses review it regularly, and if the level changes, investors in the scheme are told.
Three points help you use it properly.
- It is about risk to your principal. It tells you how much the value of your investment may swing or fall. It tells you nothing about how much the scheme may earn.
- It can change. The level reflects the current portfolio. A scheme that sits at one level today may move if its holdings change.
- The lowest level does not mean no risk. Every scheme can lose value. A lower level means the swings are expected to be smaller, not absent.
Two schemes in the same category can sit at different levels, and schemes from different categories can share a level. Use the riskometer together with the category and the stated asset allocation, not on its own.
The three scheme documents
Scheme Information Document (SID)
This is the main document for a single scheme. It sets out the investment objective, the asset allocation the scheme will follow, its investment strategy, the benchmark it is compared against, the risk factors, the riskometer, all fees and expenses, exit load, and the procedure for buying and redeeming units.
Statement of Additional Information (SAI)
This document is about the mutual fund as an institution, not about one scheme. It covers the sponsor, the trustees, the asset management company and its key people, along with general legal and tax information and the rights of unit holders. One SAI applies across all the schemes of a fund house.
Key Information Memorandum (KIM)
This is a short summary of the SID and it accompanies the application form. If you read only one document, read this one, and go to the SID for anything you want in more detail.
All three are available on the website of the asset management company. Your distributor should also make the scheme documents available to you before you invest.
What to check in ten minutes
You do not need to read every page to make an informed decision. Go through these points in the KIM or SID.
- Investment objective. Does the scheme set out to do what you need it to do?
- Asset allocation. What are the minimum and maximum proportions it can hold in equity, debt and other assets? This tells you more about the risk than the scheme’s name does.
- Riskometer level. Is it in line with your time horizon and with the fall you could live with?
- Benchmark. What is the scheme measured against?
- Expense ratio. What does the scheme cost each year, and is this the regular or the direct plan?
- Exit load. Is there a charge for redeeming early, and for how long does it apply?
- Minimum amounts. What are the minimums for a first investment, additional purchases and SIP instalments?
- Scheme-specific risk factors. Look for the risks particular to this scheme, not only the standard wording.
What the documents cannot tell you
The documents describe what a scheme is permitted to do and the risks involved. They do not tell you what it will earn. Past performance shown in a factsheet is a record of what happened, not an indication of future returns, and mutual fund returns are not guaranteed.
The documents also cannot tell you whether a scheme is suitable for you. That depends on your goal, your horizon, your other investments and how you would behave in a falling market. If anything in the documents is unclear, ask before you invest. A short question now is easier than a surprise later.