Offer document: What is it?

For many investors “mutual fund form” means one single page that your Relationship Manager / IFA thrusts in front of you while you invest, correct? That is not so. A mutual fund form means a 30 page document - called “Key Information Memorandum” - this itself is an abridged version of the “Offer Document”. Of course the word “offer” comes from the Indian Contract Act, and is an offer from a fund house to the potential investor. The potential investor is supposed to read the “offer document” and sign the form. This is because when he signs the form, he is saying “I have read and understood the terms….”. So let us see what is an offer document and what does it contain….

Offer document (OD) describes a product, and is the most important source of information for prospective investors.

· AMC (Asset Management Company) or the sponsor issues it.

· This (OD) is the primary vehicle for the investment decision.

· It is a legal document that protects and governs the right of an investor.

· Key information memorandum (KIM) is the abridged version of offer document. Application forms are issued along with the KIM.

· SEBI has designed standard format for issue of OD and KIM.

· Offer document and the KIM is valid for two years.

· ODs are to be updated, revised and printed once in every two years.

· Changes made in between these two years are circulated among investors in form of addendum or some other source of communication to investors.

· Changes made in the OD has to be filed with SEBI and should be made available at service centers and in the offices of distributors/brokers. Much easier to find it on the net - all mutual funds have decent websites.

· Offer documents should contain

- Summary information at the cover page containing name, type of the scheme, name of AMC and the mutual fund, opening and closing date of the offer, price of units, highlights of the scheme and most importantly disclaimer clause by SEBI.

- A glossary of defined terms used in the offer document.

- Risk factors – standard and scheme specific

- Due diligence certificate to be signed by Compliance Officer/CEO/Managing Director/Whole Time Director

· The above points should be in the same sequence.

· Offer document contains fundamental attributes of the scheme –

- Type of the scheme

- Investment objective

a) Investment pattern

b) Investment policies

- Load and expenses

· Offer related information – all practical information needed by investor and agents to invest in the proposed scheme.

· Condensed financial information for scheme launched during three fiscal years.

· Constitution of the mutual fund.

· About objective of the fund.

· Activities of the sponsor.

· Name and addresses of the Board of Trustees/Directors

· Management of the fund

· Associate Transactions and borrowing policies

- In case, scheme has invested more than 25% of its net assets in group companies.

a) Business given to associate brokers should be in the limit of 5% of sale and purchase made.

· NAV determination, valuation and accounting policies.

· Procedure for repurchases.

· Tax treatment of investments made in the scheme.

· Investors’ rights and services under the scheme.

- Access to information on NAV computation and unit price.

- Investors friendly services provided by the scheme and documents available for inspection by the investors.

· Brief description of investor complaint history for the last three years of existing schemes and their redressal mechanism.

· Any penalties pending litigation or proceedings should be mentioned in the OD to alert the investors.