The Mutual Fund Offer Documents: What Each One Is For

A mutual fund scheme publishes three offer documents with three separate jobs. The scheme information document describes one scheme in full. The key information memorandum is the short form handed over with the application. The statement of additional information covers the asset manager, the trustee and the arrangements shared by every scheme the manager runs. The Securities and Exchange Board of India (SEBI) sets what each must contain.

What is an offer document, before any of the three is named?

The three names are only useful once the kind of thing they name is clear, so the category comes first. An offer documentA publication made about a scheme so that a person can find out what they would be entering before they enter it. is a publication an asset managerThe company that runs the schemes and does the work of managing what they hold. makes about a scheme so that a person can find out what they would be entering, before they enter it. The purpose decides how the document reads. An offer document is written to be complete rather than to persuade, and that is why it runs long, flat and full of conditions.

The same split sits behind the counter of any shop that takes money for an order it has not delivered yet. The sign in the window is short, warm and built to bring customers in. The printed terms behind the counter are dull, dense and written by somebody who was thinking about what happens when an order goes wrong. Nobody is being sly. The two documents have different jobs, and a document written to be complete cannot also be written to be brief. Length here is a symptom of the job rather than a failure of the writing.

The same scheme carries every example below. Girnar Asset Management Limited, an invented manager, runs a range of schemes, and one of those, the Girnar Large Cap Equity Fund, is open ended and holds equity. Its record here shows Rs 4,200 crore of net assets, 120.00 crore units in issue, and 3,80,000 foliosA single account on a scheme's register. One person may run several of these at once. on the register. Kalyani Bhagat is the fund manager and Sohail Merchant heads operations.

The contents each of the three must carry are set by SEBI, and SEBI revises them. A requirement printed into a reference text does not simply age when it moves. Because the printed sentence goes on reading with all the confidence it had the day it was written, the requirement becomes untrue, and untrue quietly. So the durable answer is the name SEBI and the address sebi.gov.in, and the part that survives every revision is the routing itself: which publication holds which answer, and how to tell.

What is the scheme information document, and what is it for?

One scheme, end to end. The scheme information documentThe publication covering one scheme completely, from what it says it is trying to do through to how a complaint is made. is the publication that covers a single scheme completely: what the scheme says it is trying to do, how it says it will invest, the risks it names, the plans and options it offers, what it charges, the terms of any load it applies, who manages it, how a person transacts in it and how a complaint is made. One scheme is covered completely in this publication and in no other. Everything else about that scheme is therefore either shorter than the scheme information document or later than it.

The second half of that sentence saves more reading time than anything else about these documents, so it is worth holding on to. Shorter than this is the short form. Later than this is everything the scheme publishes as it runs. There is no fourth category hiding somewhere, and there is no longer document sitting behind this one waiting to be asked for.

Two of the Girnar Large Cap Equity Fund's own terms live here and in no other offering publication. The scheme is offered in two plans, one carrying an expense ratio of 1.65 per cent of the scheme's assets a year and one carrying 0.85 per cent, a gap of exactly 0.80 percentage points a year with an identical holding sitting behind both. Across a run of years that annual gap compounds into something much larger. The compounding is worked through under what a scheme costs. Location is what matters: the place those two plans are set out, side by side with the conditions attached to each, is the full scheme document. The scheme's exit load terms sit in the same publication, and they are that scheme's own terms rather than any industry norm.

The list above describes what the document covers rather than reproducing SEBI's required contents. The required contents are SEBI's to set and to revise, and the place to read them is sebi.gov.in, on whichever day the question comes up.

What is the key information memorandum, and who is it written for?

The key information memorandumThe short form of a scheme information document, the one that travels with the application form. takes that same scheme document and cuts it down, and what is left travels with the application form. Who it is written for is the entire design: a person standing at a counter or sitting in front of a screen who is about to sign, and who is not going to read the full document standing up. Every choice inside it follows from that reader. The memorandum is short because that reader has minutes. Its arrangement follows the fields that reader is about to fill in. Its whole reason for existing is that nobody should sign having read nothing at all.

Readers get this part wrong, so the trade is worth naming honestly. The short form buys speed, and it pays for that speed with everything that did not fit. Speed bought with detail would be a fair bargain on its own. The half worth noticing is the second one: the selection of what fits was made by somebody else, working to requirements that belong to that somebody else and that cannot be seen from inside the summary. A summary states what it contains. A summary cannot state what it left behind. Material that has been left out leaves no mark on the document it was left out of.

Which items the short form carries, and in what depth, is set by SEBI and is not stated here. The drawing below sets the two publications side by side with the mapping between them left honestly empty. An empty slot with a source named inside it is worth more than a filled one written from recollection.

What is the statement of additional information, and why is it separate?

The statement of additional informationThe standing publication about the manager, the trustee company and the arrangements every scheme in the range shares. is one standing publication about the asset manager, the trusteeThe party whose duty runs to the people who hold units rather than to the manager. company and the arrangements every scheme in the range shares: how assets are valued, who holds the securities, who audits the accounts, who keeps the register of holders, what services reach a holder and how a holder deals with the manager. Notice what is missing from that list. There is nothing in it about any one scheme. Material lifted out once cannot crowd out the terms of the scheme the reader came for, so standing apart rather than being repeated is what protects each scheme's publication.

The everyday version is a market with twenty stalls under one roof. Each stall has its own price list, and that is the document to read to find out what a stall sells. The roof, the weighing scales, the licence and the complaints register belong to the market rather than to any stall. Printing all of that on the back of every stall's price list would not make anybody better informed; it would just make it harder to find the prices.

Only two schemes are drawn above, and the third column is left empty on purpose. The Girnar range as set out here holds the Girnar Large Cap Equity Fund and the Girnar Broad Market Index Fund and no others. A third scheme drawn in to make the picture look fuller would read exactly like a disclosed one. The empty space says so instead.

Why are there three documents rather than one?

Because there are three readers, with three amounts of time and three questions. Somebody deciding whether to apply at all needs the scheme covered completely. Somebody signing right now needs the shortest thing that still says something. Somebody with a question about the arrangement rather than about the scheme needs neither of those, and would have to wade through a scheme document to reach four lines about who keeps the register. The split into three is a reading design and not an accident of history, and knowing the design is exactly what allows a reader to go straight to the right publication instead of searching all three.

One shop, three documents, and most customers have used all three without thinking about it. The card at the counter carries the six things most customers ask. The full price list on the wall carries everything, including the items nobody orders. The licence board by the door is not about the food at all; it is about who is allowed to run the place and who to complain to. Nobody thinks the shop is hiding the licence because it is not printed on the menu.

Which document answers which question?

The routing is the part to keep. Description of the three documents comes first, and the routing built on it is what actually gets used. A question is sent to a publication rather than answered from memory. A question sent to the wrong publication comes back empty, and the reader who searched the wrong one concludes that no publication carries the answer at all. That is the expensive failure hiding inside this whole subject, and it is entirely avoidable.

Notice the shape of the routing below. Two of the five questions do not land on any of the three documents at all, and that is not a gap in the drawing. The two questions that land nowhere are the single most useful thing the routing has to say.

What happens when five ordinary questions meet one scheme?

The routing runs on the Girnar Large Cap Equity Fund rather than on an abstract scheme, and each question is answered with a publication rather than with a fact. The discipline underneath all of it is not remembering the answer, but remembering where the answer lives.

The arithmetic is the argument, so the fourth question is worth doing rather than asserting. Against 120.00 crore units in issue, the Girnar Large Cap Equity Fund carries Rs 4,200 crore of net assets, or Rs 42,00,00,00,000/- once the crore is written out. Put the first over the second and the value per unitThe scheme's net assets divided by the units in issue, struck again on each dealing day. is Rs 35.00 exactly. Not about Rs 35.00, and not Rs 35.00 after rounding: 4,200 divided by 120 is exactly 35, a whole number with nothing dropped on the way. And that division is struck again on every dealing day, from that day's net assets and that day's unit count. No publication printed once could carry an answer that is struck fresh on each of them.

Two roundings happened in that table and both went down. Saying so is better than hiding it. The average folio holds 3,157.894736 units and more digits after that, shown as about 3,157.89. The average folio is worth Rs 1,10,526.3157/- and more digits after that, shown as about Rs 1,10,526/-. The first line, Rs 35.00 a unit, is not a rounding at all and is marked as exact. The last row is the check that matters: the rounded unit count multiplied by the exact value per unit lands back on the rounded folio value, so the two averages describe the same scheme rather than drifting apart.

What do the offer documents describe, and what do they never report?

The line between describing and reporting prevents more wasted reading than anything else in the subject, so take it slowly. An offer document describes the boundaries of what a scheme may do. An offer document does not report what the scheme did, what it holds today, what it is worth today or what it returned. The offering set describes, the ongoing publications report, and a reader hunting a current value per unit inside an offer document is searching a publication that was never built to carry one.

Once the line is visible, a lot of frustration disappears. Boundaries can be written down in advance, so the scheme document can state the kinds of thing the scheme may hold. What sat inside those boundaries on any particular date had not happened when the document was written, and it will be different again next time, so the document cannot state it. A boundary and a holding are two genuinely different kinds of statement, and they belong in two genuinely different kinds of publication.

The everyday version is a driving licence and a journey. The licence describes what its holder is permitted to drive. A licence is not a record of where its holder went last Tuesday, and nobody expects it to be. Asking the licence for the journey is not a small mistake in reading; it is asking a description to behave like a report.

How often the reporting publications appear, and in what form, is another SEBI matter. The two publications on the right of that line are covered separately. Only the line itself belongs with the offer documents.

What does none of the three state?

Three things, and a reader who expects any of them will fill the gap with a guess. None of the three states whether the scheme suits a particular person. None states what it will return. And none states what the manager will actually buy next week. The reason is structural rather than a disclaimer at the foot of a document: a document states what a scheme may do, and the space between what a scheme may do and what it will do is exactly the space a manager is paid to work in.

The structural reason explains something that otherwise looks like evasion, so it is worth a second reading. If a publication could close that space, there would be nothing left to manage. The width of the space is the job. So no amount of careful reading collapses it, and the honest position after finishing all three documents is that the boundaries are known, who sits inside them is known and what they charge is known, and what they will do is not. Anybody who feels they must know closes the space themselves, with a guess, and then acts as though the guess came from the document.

A risk markingA standard label printed on a scheme's publications, worked out by a method the regulator lays down. sits on these publications too, and it is easy to mistake for the missing answer. It is not. The marking is a standard label about the scheme, arrived at by a method SEBI sets, and the label is the same for every reader who looks at it. Whether the scheme suits one particular household is a question about that household, and no publication about the scheme can hold information about a reader it has never met.

Who decides what each document must contain?

SEBI does. The contents of each document, the revision cycle for each, what must be filed before a scheme is offered and when, how the documents must be made available, and how the risk marking is arrived at are all SEBI's, and every one of them is subject to change. A reference carrying a stated requirement is wrong rather than merely stale the day that requirement moves. A reference carrying the name SEBI and the address sebi.gov.in keeps working through every revision. So nine requirements are pointed at rather than printed.

So what follows is a card rather than an answer. The card below has its rows named and its rule-set rows drawn empty, with SEBI printed inside each empty row. The card can be filled from the source in an afternoon, and what goes in will be right on the day it goes in. The same rows filled in from somebody's recollection give a card that looks exactly the same and cannot be trusted. The same applies to any addendumA notice that changes something already published, issued after the original document. issued after a document was published. An addendum exists, it changes what the document says, and checking for one is covered under working out which version of a document is in hand.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.