SEBI Revamps Mutual Fund Offer Document Format to Boost Ease of Investing

November 7, 2023 Mutual Fund

According to the Securities and Exchange Board of India (SEBI’s) Mutual Fund Regulations, every AMC (Asset Management Company) or Mutual Fund house must release an Offer Document (OD) for each mutual fund scheme it launches.

The Offer Document (OD) consist of a SID (Scheme Information Document), a SAI (Statement of Additional Information), and a KIM (Key Information Memorandum. The SID is considered the most useful document among these for mutual fund scheme analysis.

Prior to making any investment, it is essential for investors to thoroughly read the mutual fund offer documents carefully. Providing investors with comprehensive information about the mutual fund scheme is the primary goal of offer and scheme-related documents. All investments must be well-informed, and reading such documents can contribute to the much-needed transparency.

The format in which AMCs file offer documents for mutual fund schemes has been amended by the SEBI to expedite the distribution of pertinent information to investors.

Let’s explore what a Scheme Information Document (SID) is and its significance in the investment choices made by investors.

What is a Scheme Information Document (SID)?

The Scheme Information Document (SID) is one of the many fund offer documents, which contains nearly all information about a mutual fund scheme, including minimum subscription quantities, entry and exit loads, (Systematic Investment Plan) SIP information, fund managers and their backgrounds, risk tolerance, the scheme’s goal, etc.

Although a SID’s format varies from fund house to fund house, the content is generally organised in the same way. You can conveniently access SIDs through Asset Management Companies (AMCs) websites or any investment platform you choose.

The process of drafting each SID is governed by SEBI regulations:

• AMCs must submit a draft SID to SEBI before initiating a new fund offer (NFO). If any errors are found, SEBI will send the SID back to the AMC.
• A final SID is presented to the Board for approval before it is made available for distribution. Every six months or so, the SID is updated to reflect all the most recent changes.

The final SEBI-approved SID and other offer documents for every mutual fund scheme can be found on the official website of AMCs and on the SEBI website.

SEBI Makes Mutual Fund Offer Documents more Transparent and Investor-Friendly…

The markets regulator SEBI on Wednesday rationalised and streamlined the offer document format in an effort to facilitate the compilation of the Scheme Information Document (SID) by mutual funds and improve investor readability and transparency.

The Mutual Fund Advisory Committee of SEBI and the industry association AMFI provided recommendations that influenced the decision to redesign the SID format.

The Securities and Exchange Board of India (SEBI), in a circular dated November 01, 2023, announced a new format of the SID of mutual fund schemes.

What are the modifications in the New format of the Scheme Information Document (SID)?

Significant changes have been introduced for easier understanding of the SID of mutual fund schemes as listed below:

Summary of the Scheme: In the ‘summary of the scheme’ section, the AMC is required to highlight the name of the benchmark of the scheme and provide justification, specific to the scheme objective, for the use of the benchmark index with which the performance of the scheme can be compared with.

In addition, if relevant, this section must highlight the second-tier benchmark. A second-tier benchmark typically draws attention to the investment style or strategy that the fund manager adopts within the category.

Furthermore, a website link containing the scheme factsheet and the Total Expense Ratio (TER) for the last six months will be included in the ‘summary of the scheme’ section.

[Read: SEBI Proposes Sweeping Reforms for Expense Ratio of Mutual Fund Investments

SEBI Proposes Two Approaches to Performance-linked Expense Ratio for Mutual Funds]

Investment by Fund Managers: Key personnel and scheme fund managers must disclose the total amount invested in the scheme.

Disclosure of Scheme Holdings: Mutual funds are now required to use functioning web links to reveal scheme portfolio holdings. The press release stated that a functional web connection would be used to disclose the scheme’s portfolio holdings, which include the top 10 holdings by the issuer and the fund allocation across various sectors.

Creation of Segregated Portfolio: As of this moment, asset management companies (AMCs) retain the authority to decide whether or not to create segregated portfolios. AMCs must disclose provisions for a segregated portfolio in SIDs and Statement of Additional Information (SAI).

Only in cases when SID has enabling provisions in place can segregated portfolios be established. It is typically generated when a security issuer gets downgraded to below investment grade or stops paying interest.

Disclosure of Risk-O-Meter: On the front page of the initial offering application form, SID, Key Information Memorandum (KIM), and Common application form, AMCs are required to disclose the risk-o-meter of the benchmark.

What is the Deadline for SID Updation by AMCs?

This updated format for the Scheme Information Document (SID) of mutual funds will be effective from April 01, 2024. Mutual funds are required to file draft SIDs with SEBI on or before March 31, 2024.

The old SID format may be utilised for SIDs that have already been filed with SEBI and are scheduled to launch on or before March 31, 2024, provided that these SIDs are updated by April 30, 2024.

In line with the new SID format, within two months of the circular’s release, the AMFI and SEBI should collaborate to work and make the necessary modifications to the KIM and SAI forms as well.

[Read: How to Choose Mutual Funds For Your Investment Portfolio]

To conclude…

In the year 2023, the Securities and Exchange Board of India (SEBI) has taken significant steps like warning and penalties to unregistered Finfluencers and making amendments in SEBI regulations to enhance transparency, protect investors’ interest, and promote an ethical investment environment.

[Read: SEBI Chief’s Warning to Finfluencers! Here’s What She Said….

SEBI Plans to Reduce Compliance Checks for Passive Funds with Mutual Fund Light Regulations]

As stated in the SEBI Circular – “These recent SID modifications are issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.”

This article first appeared on PersonalFN here