Chapter 4 : Offer Document
• The AMC decides on a scheme to take to the market. This is decided on the
basis of inputs from the CIO on investment objectives that would benefit
investors, and inputs from the CMO on the interest in the market for the
investment objectives.
• AMC prepares the Offer Document for the NFO. This needs to be approved
by the Trustees and the Board of Directors of the AMC
• The documents are filed with SEBI. The observations that SEBI makes on
the Offer Document need to be incorporated. After approval by the
trustees, the Offer Document can be issued in the market.
• Investors need to note that their investment is governed by the principle of
caveat emptor i.e. let the buyer beware. An investor is presumed to have
read the Offer Document, even if he has not actually read it. Therefore, at a
future date, the investor cannot claim that he was not aware of something,
which is appropriately disclosed in the Offer Document.
• Mutual Fund Offer Documents have two parts: Scheme Information
Document (SID), which has details of the scheme. Statement of Additional
Information (SAI), which has statutory information about the mutual fund,
that is offering the scheme.
• It stands to reason that a single SAI is relevant for all the schemes offered
by a mutual fund. In practice, SID and SAI are two separate documents,
though the legal technicality is that SAI is part of the SID.
• While SEBI does not approve or disapprove Offer Documents, it gives its
observations. The mutual fund needs to incorporate these observations in
the Offer Document that is offered in the market. Thus, the Offer
Documents in the market are “vetted” by SEBI, though SEBI does not
formally “approve” them.
• If a scheme is launched in the first 6 months of the financial year (say, April
2010), then the first update of the SID is due within 3 months of the end of
the financial year (i.e. by June 2011).
• If a scheme is launched in the second 6 months of the financial year (say,
October 2010), then the first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2012).
• Regular update is to be done by the end of 3 months of every financial
year. Material changes have to be updated on an ongoing basis and
uploaded on the websites of the mutual fund and AMFI.
• KIM is essentially a summary of the SID and SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is
to be accompanied by the KIM.
• KIM is to be updated at least once a year. As in the case of SID, KIM is to be
revised in the case of change in fundamental attributes. Other changes can
be disclosed through addenda attached to the KIM.
• The Scheme/Plan shall have a minimum of 20 investors and no single
investor shall account for more than 25% of the corpus of the
Scheme/Plan(s).
•Legally, SAI is part of the SID.
Chapter 5
• Historically, individual agents would distribute units of Unit Trust of
India and insurance policies of Life Insurance Corporation. They would
also facilitate investments in Government’s Small Savings Schemes.
Further, they would sell Fixed Deposits and Public Issues of shares of
companies, either directly, or as a sub-broker of some large broker.
• UTI, LIC or other issuer of the investment product (often referred to in
the market as “product manufacturers”) would advertise through the
mass media, while an all-India field force of agents would approach
investors to get application forms signed and collect their cheques. The
agents knew the investors’ families personally – the agent would often
be viewed as an extension of the family.
• Independent Financial Advisors (IFAs), who are individuals. The bigger
IFAs operate with support staff who handles back-office work, while
they themselves focus on sales and client relationships.
• Non-bank distributors, such as brokerages, securities distribution
companies and non-banking finance companies
• The internet gave an opportunity to mutual funds to establish direct
contact with investors. Direct transactions afforded scope to optimize
on the commission costs involved in distribution. Investors, on their
part, have found a lot of convenience in doing transactions
instantaneously through the internet, rather than get bogged down
with paper work and having to depend on a distributor to do
transactions. This has put a question mark on the existence of
intermediaries who focus on pushing paper, but add no other value to
investors.
• The institutional channels have had their limitations in reaching out
deep into the hinterland of the country. A disproportionate share of
mutual fund collections has tended to come from corporate and
institutional investors, rather than retail individuals for whose benefit
the mutual fund industry exists. Stock exchanges, on the other hand,
have managed to ride on the equity cult in the country and the power
of communication networks to establish a cost-effective all-India
network of brokers and trading terminals. This has been a successful
initiative in the high-volume low-margin model of doing business, which
is more appropriate and beneficial for the country.
• SEBI, in September 2012, provided for a new cadre of distributors, such
as postal agents, retired government and semi-government officials
(class III and above or equivalent), retired teachers and retired bank
officers with a service of at least 10 years, and other similar persons
(such as Bank correspondents) as may be notified by AMFI/ AMC from
time to time. These new distributors are allowed to sell units of simple
and performing mutual fund schemes. Simple and performing mutual
fund schemes comprise of diversified equity schemes, fixed maturity
plans (FMPs) and index schemes that have returns equal to or better
than their scheme benchmark returns during each of the last three
years.
• A fund may appoint an individual, bank, non-banking finance company
or distribution company as a distributor. No SEBI permission is required
before such appointment. SEBI has prescribed a Certifying Examination,
passing in which is compulsory for anyone who is into selling of mutual
funds, whether as IFA, or as employee of a distributor or AMC.
Qualifying in the examination is also compulsory for anyone who
interacts with mutual fund investors, including investor relations teams
and employees of call centres.
• There are no SEBI regulations regarding the minimum or maximum
commission that distributors can earn. However, SEBI has laid down
limits on what the total expense (including commission) in a scheme can
be.
•Initial or Upfront Commission, on the amount mobilized by the
distributor.
• Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor.The trail commission is
normally paid by the AMC on a quarterly basis. Since it is calculated on
net assets, distributors benefit from increase in net assets arising out of
valuation gains in the market.
•Further, unlike products like insurance, where agent commission is paid
for a limited number of years, a mutual fund distributor is paid a
commission for as long as the investor’s money is held in the fund.
•A point to note is that the commission is payable to the distributors to
mobilise money from their clients. Hence, no commission – neither
upfront nor trail – is payable to the distributor for their own
investments (self business).
•Typically, AMCs structure their relationship with distributors as Principal
to Principal. Therefore, the AMC it is not bound by the acts of the
distributor, or the distributor’s agents or sub-brokers.
• In hoardings / posters, the statement, “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing”, is to be displayed in black letters of at least 8 inches height
or covering 10% of the display area, on white background.
• In audio-visual media, the statement “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing” (without any addition or deletion of words) has to be
displayed on the screen for at least 5 seconds, in a clearly legible font-
size covering at least 80% of the total screen space and accompanied by
a voice-over reiteration. The remaining 20% space can be used for the
name of the mutual fund or logo or name of scheme, etc.
• Mutual Funds shall not offer any indicative portfolio and indicative
yield. No communication regarding the same in any manner whatsoever
shall be issued by any Mutual Fund or distributors of its products.
• The AMC decides on a scheme to take to the market. This is decided on the
basis of inputs from the CIO on investment objectives that would benefit
investors, and inputs from the CMO on the interest in the market for the
investment objectives.
• AMC prepares the Offer Document for the NFO. This needs to be approved
by the Trustees and the Board of Directors of the AMC
• The documents are filed with SEBI. The observations that SEBI makes on
the Offer Document need to be incorporated. After approval by the
trustees, the Offer Document can be issued in the market.
• Investors need to note that their investment is governed by the principle of
caveat emptor i.e. let the buyer beware. An investor is presumed to have
read the Offer Document, even if he has not actually read it. Therefore, at a
future date, the investor cannot claim that he was not aware of something,
which is appropriately disclosed in the Offer Document.
• Mutual Fund Offer Documents have two parts: Scheme Information
Document (SID), which has details of the scheme. Statement of Additional
Information (SAI), which has statutory information about the mutual fund,
that is offering the scheme.
• It stands to reason that a single SAI is relevant for all the schemes offered
by a mutual fund. In practice, SID and SAI are two separate documents,
though the legal technicality is that SAI is part of the SID.
• While SEBI does not approve or disapprove Offer Documents, it gives its
observations. The mutual fund needs to incorporate these observations in
the Offer Document that is offered in the market. Thus, the Offer
Documents in the market are “vetted” by SEBI, though SEBI does not
formally “approve” them.
• If a scheme is launched in the first 6 months of the financial year (say, April
2010), then the first update of the SID is due within 3 months of the end of
the financial year (i.e. by June 2011).
• If a scheme is launched in the second 6 months of the financial year (say,
October 2010), then the first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2012).
• Regular update is to be done by the end of 3 months of every financial
year. Material changes have to be updated on an ongoing basis and
uploaded on the websites of the mutual fund and AMFI.
• KIM is essentially a summary of the SID and SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is
to be accompanied by the KIM.
• KIM is to be updated at least once a year. As in the case of SID, KIM is to be
revised in the case of change in fundamental attributes. Other changes can
be disclosed through addenda attached to the KIM.
• The Scheme/Plan shall have a minimum of 20 investors and no single
investor shall account for more than 25% of the corpus of the
Scheme/Plan(s).
•Legally, SAI is part of the SID.
Chapter 5
• Historically, individual agents would distribute units of Unit Trust of
India and insurance policies of Life Insurance Corporation. They would
also facilitate investments in Government’s Small Savings Schemes.
Further, they would sell Fixed Deposits and Public Issues of shares of
companies, either directly, or as a sub-broker of some large broker.
• UTI, LIC or other issuer of the investment product (often referred to in
the market as “product manufacturers”) would advertise through the
mass media, while an all-India field force of agents would approach
investors to get application forms signed and collect their cheques. The
agents knew the investors’ families personally – the agent would often
be viewed as an extension of the family.
• Independent Financial Advisors (IFAs), who are individuals. The bigger
IFAs operate with support staff who handles back-office work, while
they themselves focus on sales and client relationships.
• Non-bank distributors, such as brokerages, securities distribution
companies and non-banking finance companies
• The internet gave an opportunity to mutual funds to establish direct
contact with investors. Direct transactions afforded scope to optimize
on the commission costs involved in distribution. Investors, on their
part, have found a lot of convenience in doing transactions
instantaneously through the internet, rather than get bogged down
with paper work and having to depend on a distributor to do
transactions. This has put a question mark on the existence of
intermediaries who focus on pushing paper, but add no other value to
investors.
• The institutional channels have had their limitations in reaching out
deep into the hinterland of the country. A disproportionate share of
mutual fund collections has tended to come from corporate and
institutional investors, rather than retail individuals for whose benefit
the mutual fund industry exists. Stock exchanges, on the other hand,
have managed to ride on the equity cult in the country and the power
of communication networks to establish a cost-effective all-India
network of brokers and trading terminals. This has been a successful
initiative in the high-volume low-margin model of doing business, which
is more appropriate and beneficial for the country.
• SEBI, in September 2012, provided for a new cadre of distributors, such
as postal agents, retired government and semi-government officials
(class III and above or equivalent), retired teachers and retired bank
officers with a service of at least 10 years, and other similar persons
(such as Bank correspondents) as may be notified by AMFI/ AMC from
time to time. These new distributors are allowed to sell units of simple
and performing mutual fund schemes. Simple and performing mutual
fund schemes comprise of diversified equity schemes, fixed maturity
plans (FMPs) and index schemes that have returns equal to or better
than their scheme benchmark returns during each of the last three
years.
• A fund may appoint an individual, bank, non-banking finance company
or distribution company as a distributor. No SEBI permission is required
before such appointment. SEBI has prescribed a Certifying Examination,
passing in which is compulsory for anyone who is into selling of mutual
funds, whether as IFA, or as employee of a distributor or AMC.
Qualifying in the examination is also compulsory for anyone who
interacts with mutual fund investors, including investor relations teams
and employees of call centres.
• There are no SEBI regulations regarding the minimum or maximum
commission that distributors can earn. However, SEBI has laid down
limits on what the total expense (including commission) in a scheme can
be.
•Initial or Upfront Commission, on the amount mobilized by the
distributor.
• Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor.The trail commission is
normally paid by the AMC on a quarterly basis. Since it is calculated on
net assets, distributors benefit from increase in net assets arising out of
valuation gains in the market.
•Further, unlike products like insurance, where agent commission is paid
for a limited number of years, a mutual fund distributor is paid a
commission for as long as the investor’s money is held in the fund.
•A point to note is that the commission is payable to the distributors to
mobilise money from their clients. Hence, no commission – neither
upfront nor trail – is payable to the distributor for their own
investments (self business).
•Typically, AMCs structure their relationship with distributors as Principal
to Principal. Therefore, the AMC it is not bound by the acts of the
distributor, or the distributor’s agents or sub-brokers.
• In hoardings / posters, the statement, “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing”, is to be displayed in black letters of at least 8 inches height
or covering 10% of the display area, on white background.
• In audio-visual media, the statement “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing” (without any addition or deletion of words) has to be
displayed on the screen for at least 5 seconds, in a clearly legible font-
size covering at least 80% of the total screen space and accompanied by
a voice-over reiteration. The remaining 20% space can be used for the
name of the mutual fund or logo or name of scheme, etc.
• Mutual Funds shall not offer any indicative portfolio and indicative
yield. No communication regarding the same in any manner whatsoever
shall be issued by any Mutual Fund or distributors of its products.
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