Work your Way up with your Wealth building Winners!

Work your Way up with your Wealth building Winners!

Mutual Funds are proven winners and one of the best ways for the small investor to build wealth while managing risk. As already discussed, a firm foundation can be laid by defining and articulating your investment goals and identifying the types of funds you need to reach your goals. But the key to finding the right Mutual Fund is to

Research your resources…..

Every financial daily offers daily NAVs of all Mutual Fund schemes. Magazines also come out with annual survey of Mutual Funds. There are even magazines dedicated entirely to the Mutual Fund industry. Internet is indeed a great place for information. There are dedicated sites as well as financial sites, which offer information on Mutual Funds. The Mutual Funds themselves maintain websites which are a veritable treasuretrove of resources.

Prospecting the Prospectus seems to be the key to catapulting yourself to the winning position with precision.

The Prospectus or the Offer Document explains the financials, performance, objectives, fees, risks associated with a fund and legal issues. This document is as comprehensive as an encyclopedia. However, funds also offer a simplified "fund profile" known as the Key Information Memorandum (KIM) that covers the highlights in a few pages. For most investors, the KIM should suffice. But you should also be aware of the Offer Document.

Nobody wants to read the Offer Document. It is a document that describes a Mutual Fund, often in legal and financial terms that may sound awfully technical. But the language is precise for a reason. The SEBI has strict guidelines about what the fund can say about itself and how it must present information. Remember, the SEBI's approval of a prospectus is only that. It is not an endorsement of any particular investment. Simplifying a prospectus is never easy because it is a document that is trying to serve two purposes. Its stated objective is disclosure: informing investors how a fund invests and operates. But it is also a document that mutual fund company lawyers design as a litigation shield, making sure the fund managers will be able to run the fund without inviting lawsuits.

Don't let the Offer Document unnerve you. The financial matters and investment policies may be unique. But much of the other material is boiler-plate and doesn't vary much from fund to fund. And not all of it is pertinent to every investor. When thumbing through the Offer Document, look for important statistical nuggets like the fund's condensed financial history, fund performance (showing the average annual total returns and cumulative total returns for the fund over various fiscal-year periods) and the investment policy section (outlining the overall strategy, the permitted investments in the broadest of terms and restrictions, if there are any). Pay careful attention to the investment objective and how the fund managers plan to achieve it, especially the kind of risk they might undertake (with your money). Be forewarned. Most fund prospectuses are written in a way that gives fund managers the widest latitude and discretion The information in this section helps to describe the fund's character. The document plainly lists all sales charges, deferred sales charges, redemption fees, exchange fees, management fees and other pertinent expenses. It also outlines the various options available to investors like Growth, Dividend-reinvestment and Dividend Payout. (These options will be explained and analysed in the context of tax implications in the forthcoming blogs.) Last but not the least, the risk factors will be stated in no uncertain terms.

You are not going to have trouble finding out details about any fund, so you need to know what to concentrate on rather than risk information overload. Look out for the signs of a well-managed fund. You should focus on a fund's performance, consistency and management.

Evaluating a Fund’s performance will be dealt with in detail in the subsequent blogs.