How to read a scheme document

“Read all scheme related documents carefully” is on every piece of mutual fund material in India, including ours. It is good advice delivered in a form almost designed to be ignored. This is the shorter version: which documents exist, and which parts of them actually change a decision.

The three documents

• The SID (Scheme Information Document) is the long one, often eighty pages or more. Everything binding about the scheme is in here.
• The KIM (Key Information Memorandum) is the summary that accompanies the application form. Same facts, far shorter, less detail on risk.
• The factsheet is published monthly. It is the only one of the three that tells you what the scheme holds now, and it is the one you will re-read.

There is also the SAI (Statement of Additional Information), which covers the fund house rather than the scheme. You can skip it unless something specific prompts you.

1. The investment objective

Two or three sentences near the front of the SID. Read it twice, and pay attention to the hedge at the end — almost every one closes with something like “there is no assurance that the objective of the scheme will be achieved”. That sentence is doing real work. It is the fund house telling you, in writing, that the mandate is a description of intent and not a promise of outcome.

2. The asset allocation table

A table of instrument types with minimum and maximum percentages. This is the scheme's actual constitution — the fund manager can move within these bands and cannot move outside them.

Look at the widest band. A scheme permitted to hold anywhere between 0% and 35% in debt is a materially different proposition depending on where in that range it currently sits, and the factsheet is where you find out. Narrow bands mean you know what you are getting; wide bands mean you are also buying the manager's discretion.

3. The riskometer and the risk factors

The riskometer is a six-level dial from Low to Very High, prescribed by SEBI and updated monthly. It is a blunt instrument and it is genuinely useful for one thing: catching a mismatch between what you assumed and what the scheme is. A debt scheme reading High is telling you something.

Underneath it sit the scheme-specific risk factors. Skip the generic ones that appear in every document and read the ones written for this scheme — concentration in a sector, small-cap liquidity, credit quality, currency exposure. This is the section people skip, and it is the section that describes the bad scenario in the fund house's own words.

4. Fees, expenses and load

Find the total expense ratio, the annual running cost deducted from the scheme. Note the direct plan and regular plan figures separately: the gap between them is the distributor commission, and it is the number to have in front of you when deciding whether to use a distributor at all.

Then find the exit load — typically a percentage charged on redemption within some period. Read the exact wording, because “within 365 days” and “within one year of allotment of each instalment” are different rules and the second one matters a great deal to an SIP.

5. The benchmark

The index the scheme measures itself against. Its only real use to you is as a sanity check on the label: a scheme calling itself large-cap and benchmarking to a mid-cap index is worth a question.

Performance against benchmark, where shown, is historical and does not indicate future results. Treat it as a description of what has already happened and nothing more.

6. The portfolio, in the factsheet

This is where the abstract becomes concrete. Four things:

• Top ten holdings and their combined weight. Thirty percent in ten names is a concentrated scheme whatever the name on the front says.
• Sector weights. Especially if you hold several schemes — this is how you discover that four of them own the same banks.
• Cash held. Persistently high cash is a decision the manager has made on your behalf.
• For debt schemes: credit quality and average maturity. These two numbers tell you more about how a debt scheme will behave than the category name does.

7. The operational small print

Less interesting, occasionally expensive to have missed. Minimum investment and minimum SIP amount. The cut-off time that decides which day's NAV you get. How long redemption proceeds take to reach your bank. Whether the scheme has a lock-in — an ELSS locks each instalment for three years.

Where to find them

All three are free on the fund house's own website, and on the AMFI site. They are not marketing material and they are not written to persuade you; they are filed with the regulator, which is precisely what makes them worth reading over anything else you will be shown.

If you would rather go through one with someone, that is a normal thing to ask us for. We will not tell you whether to buy it, but we will make sure you know what the document says. Have a look at what we help with, or talk to us.