From KIID to KID: new rules, better investment decisions
February 17, 2023
5 minutes to read
The new European rules offer you a much more concrete view of the costs of investment funds. Changes have also been introduced to enable you to make even better-informed decisions when buying a fund.
It may have come to your attention that when you are buying an investment fund, you first have to read a set of documents before you can press the buy button. In Europe, providers of financial package products such as investment funds have to inform you thoroughly before you can invest in their products. These rules are less strict when you buy straightforward shares. This is quite easy to explain: if you buy an AB Inbev share for example, you probably know very well what you are investing in. However, if you are buying a fund called Multiple Opportunities, you are less likely to know exactly what you are investing in or what the fund’s strategy is.
The basics at a glance
If you buy an investment fund, you first have to indicate that you have read the provided information. One of the documents you are expected to read in advance is the prospectus. This is usually a very long PDF document that explains the fund's strategy (often with lots of jargon and disclaimers). Fortunately, Europe also requires every fund manager to provide a product sheet to private investors. That document is intended to inform you more quickly and in a more accessible way. The product sheet allows investors to find out the main characteristics and risks of an investment fund in just a few minutes. It is a kind of fund passport. Product sheets have been standardised to make it easy for you to compare funds. Until recently, these product sheets were officially called Key Investor Information Documents or KIIDs. In early 2023, the KIID was replaced by the KID: the Key Investor Document.
From KIID to KID: four major changes
The idea behind the KID is still the same: to provide a concise explanation of what exactly you are considering investing in. However, there are some important changes in terms of both content and format. For example, the KID has one extra page (three instead of two) and has eight sections rather than six. Here are the biggest changes:
1. More details about the costs
Costs can significantly reduce an investment fund's return. That is why the new KID gives investors an even better insight into the potential impact of these costs. As before, any entry and exit costs, ongoing costs and performance fees must be disclosed. However, in the past these costs were only mentioned as percentages and now they also have to be shown in absolute amounts. The impact of these costs must also be shown over different periods. This makes the costs a lot more transparent and tangible.
2. Future return potential rather than historical return
The old KIID showed you the fund's performance for up to ten years in the past. Of course, this could create false investor expectations. It is important to bear in mind that past performance is no guarantee for the future. For example, a fund may underperform for five years and then experience three golden years (or vice versa). That is why the new document no longer includes this historic performance. The KID is forward-looking and gives you an estimate of the future return potential in various scenarios: a stress, unfavourable, moderate and favourable scenario. The potential return is shown for each scenario over several years: after one year and at the end of the recommended investment horizon.
Please note that these are estimates. The amounts and percentages are therefore certainly no guarantee. Of course, this also raises the question of what funds base these calculations of future potential returns on. Unfortunately, the answer is somewhat disappointing, as the financial regulator has indicated that expectations must be based on past performance going back up to ten years. It is therefore best to take these projections with a pinch of salt.
3. Recommended number of investment years (investment horizon)
From now on, the KID will show you how long you should keep the investment fund in your portfolio before you may decide to sell it. This recommended time frame gives an indication of how long you need to keep your investment to statistically achieve a positive return. This enables you to make a choice that is better suited to your financial plans for the future.
4. Different risk calculation method
As in the old KIID, the new KID provides a risk indicator on a scale of 1 to 7. Previously, this risk was based on past price fluctuations. A risk indicator of 1 meant very low volatility and 7 meant extremely high volatility. The disadvantage of this approach is that it is incomplete. Volatility is just one of the many risk aspects. The new KID uses a different calculation. The score is now based on credit risk as well as historical volatility. In other words, it also looks at the likelihood that the fund manager will not be able to repay the investors.