MF offer document: Is it a caveat for the investor

We have often seen on TV and heard this phrase:

"Mutual funds are subject to market risks, please read the offer document carefully before investing".

Does this mean that:

1. The buyer is under a caveat that he is not protected against risks if he is not careful in reading the offer document.
2. The fund manager of the mutual fund is not responsible for protection against risk in respect of the buyer's units?
3. If there are risks, what are they and how they can be mitigated?
4. What are some significant contents of an offer document?
5. What is the recourse of action (legal if any) for a buyer in case he is affected by market risks?

Answer to the above:

The solution to this query lies in the question itself. The investors will have to read

the offer document carefully prior to investing. SEBI has framed detailed regulations for Mutual funds with respect to the Sponsor, AMC, trustees and other constituent whereby it is compulsory for any mutual fund coming out with a NFO (New Fund Offer) to lay down the investor’s rights and obligations with respect to the scheme which is on offer.

Investors are the owners of the funds assets and therefore it’s imperative that they are aware of their rights’ with respect to the scheme’s assets, its management, recourse to the trustees, the AMC and other constituents.

The rights of the unit-holders can be summarized below:

• Right of proportionate beneficial ownership of the scheme’s assets
• Right to receive timely service like receipt of dividend, interest, account statements, annual report, redemption proceeds etc.
• Right to obtain information from trustees on information that may have adverse bearing on their investments.
• Right to inspect major documents of the fund like MOA, material contracts, offer documents of the scheme
• Right to be informed of any change in fundamental attributes of a scheme, investment objectives, as investors shall be offered a exit route in case they are not satisfied with the changes in the scheme.
• If 75% of investors to the scheme pass the requisite resolution, the scheme shall be winded up.

Investor Limitations:

Investors do enjoy a number of rights but at the same time they are subject to certain limitations in their capacity as unit holders as follows:

• Unit holders cannot sue the trust and do not have legal recourse to the trust as they are not distinct from the trust. However they can sue the trustees if aggrieved by any action of the trustees that’s against their interest.
• The sponsors of the mutual fund do not have any legal obligation to provide any assured return to the shareholders or meet any shortfall in case the expected return/assured return is not achieved. However if the sponsor provides a guarantee as to the assured return in the offer document, then the investor has a right to sue the sponsors to make good the shortfall in returns.

Therefore as already stated above, it’s imperative that the investor studies the offer document carefully before investing in the units of the scheme. He must appreciate the fundamental attributes of the scheme, risk factors, rights and track record of the fund and sponsors prior to investing and post investing in the scheme he must monitor the performance by carefully tracking the financial performance, portfolio composition and moves, reading research reports and seeking information from trustees.

SEBI has an investor’s complaints redressal mechanism in force whereby complaints from various investors are entertained and fund managements are ordered to solve and redress the problems. Another aspect through which SEBI protects investor interest is by requiring the sponsors of the new scheme to appoint compliance Officer and obtain a due diligence certificate to the effect that all SEBI regulations and guidelines are complied with in letter and spirit.

To summarize, failure on behalf of the investor to study the offer document does not entitle him to seek legal recourse against the trustees, AMC, fund manager or sponsors at a later date.