Key Points to Consider When Reading a Scheme Information Document (SID)

[Read: Best Mutual Funds to Invest Now]

The SID contains crucial information about the fund's objectives, strategies, risk factors, and performance. Understanding the key points within this document may help you make informed investment choices.

Here's a detailed guide on the key points to consider when reading a SID:

1. Fund Overview

The first section of the SID typically offers a brief overview of the mutual fund, including its investment objective and style.

• Understand the primary goal of the fund, whether it aims for long-term capital appreciation, income generation, or a combination of both.

• The SID will often explain whether the fund follows an active, passive, or hybrid investment strategy. Active management means fund managers are selecting securities to outperform a benchmark, while passive management tracks an index.

2. Investment Strategy

The SID elaborates on the fund's investment philosophy and strategy. It may provide details about the sectors, asset classes, or geographical areas the fund will focus on.

• The SID will typically show how the fund intends to allocate investments among different asset classes such as equity, debt, or other alternative assets.

• Some funds may have a sectoral or thematic focus (e.g., technology, healthcare, or infrastructure). Understanding this will help you assess if it aligns with your investment goals.

3. Minimum Investment and SIP Details

The SID will outline the minimum investment requirement, whether it's a lump sum or Systematic Investment Plan (SIP). It is crucial to assess if these requirements fit your investment capabilities.

• Lump Sum Investment: One-time investment where you invest a large sum of money at once.

• SIP Investment: A method where you invest a fixed amount regularly (monthly or quarterly), helping in rupee cost averaging.

4. Risk Factors

Risk is inherent in any investment, and the SID will provide an in-depth explanation of the risk factors associated with the mutual fund. This includes:

• Market Risk:  The possibility of losses due to changes in market prices or conditions.

• Interest Rate Risk:  For debt-oriented funds, changes in interest rates may impact bond prices.

• Credit Risk:  The risk of default in debt securities, which is higher in funds that invest in lower-rated bonds.

• Liquidity Risk:  Funds that invest in illiquid assets could be harder to sell, especially during periods of market stress.

It's essential to evaluate whether the fund associated risks are in line with your risk tolerance.

5. Asset Allocation

The SID provides details on how the fund plans to distribute its assets across various sectors, industries, and geographies. This is essential for evaluating whether the fund's investment mix aligns with your own investment objectives and risk tolerance.

For instance, a large-cap equity fund will focus on well-established companies, while a small-cap fund may invest in emerging companies with higher growth potential but also higher risk.

[Read: The Ultimate Guide to the Best SIP Plans for 2025]

6. Performance History

A crucial part of the SID is the fund's historical performance, it could be shown as the absolute return or CAGR (Compound Annual Growth Rate), giving you an idea of how the fund has performed over different time periods or market phases.

• Compare the fund's returns against its benchmark index. Outperformance of the benchmark is a positive indicator.

• Metrics such as Sharpe Ratio and Standard Deviation will help evaluate how well the fund has performed relative to its risk.

7. Fund Manager Information

The fund manager's experience and track record are critical in determining the future performance of a fund. The SID will provide details about the fund manager's background, experience, and any other funds they are managing. Some key points to look out for:

• A track record of good performance under various market conditions is a positive sign.

• The competence of the management team may significantly affect fund performance.

8. Expense Ratio

The expense ratio is a critical factor to consider as it directly impacts your returns. The SID will mention the expense ratio, which is the percentage of the fund's assets used to cover management fees, administrative costs, and other expenses.

[Read: Should You Focus Much on the Expense Ratio When Investing in Mutual Funds]

• Generally, lower fees mean higher returns for investors. Compare expense ratios across similar funds to ensure you're getting value for your investment.

• Apart from the management fee, watch out for additional costs like entry/exit load, which could impact the returns.

9. Exit Load and Redemption Process

Understanding the exit load is important if you plan to redeem your units within a certain period after investing. Some funds impose a penalty for early redemption, known as the exit load.

The SID will also outline the redemption process, whether online or offline, and how long it typically takes to receive the redemption amount after selling the units.

10. Tax Implications

Understanding the tax treatment of a mutual fund is important, as it could influence your post-tax returns. The SID will outline the tax implications of the fund's capital gains, dividend distributions, and other aspects:

Post-Budget 2024, significant changes were introduced to the taxation of equity and debt mutual funds, affecting both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). These changes, effective from July 23, 2024, aim to simplify the tax structure for mutual fund investors.

• Equity Funds:  Generally taxed at 12.5% for LTCG, (up from the previous 10%) if held for more than one year. If the holding period is 12 months or less, the gains are taxed at 20% (up from the previous 15% tax rate).

• Debt Funds:  Taxation depends on the holding period. STCG (less than 3 years) are taxed as per the investor's income tax slab, while LTCG are taxed at 12.5% without indexation if the units were redeemed on or after July 23, 2024.

Understanding the SID ensures transparency and helps you avoid surprises, empowering you to choose the right mutual fund scheme with confidence. Always remember, a well-informed investor is better equipped to achieve long-term financial success.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.