How to read the key information document (KID)
Three standardised pages that accompany funds, investment-based insurance and other products. What they contain and what to look out for.
What it is and what it is for
In the European Union, anyone offering "packaged" investment products to the public, such as investment funds, ETFs, insurance-based investment products and structured products, must provide a short document before purchase called the KID, the Key Information Document. The United Kingdom and other countries have similar standardised disclosure documents under their own rules.
It has the same structure for all products, which is exactly why it allows comparison. It is not marketing material: it is a disclosure required by law, and its content must be accurate and not misleading.
The risk indicator
The first thing that stands out is a scale from 1 to 7, the summary risk indicator. A value of 1 corresponds to the lowest risk, 7 to the highest. It takes into account how much the value of the product may fluctuate and the possibility that the issuer is unable to pay.
Two caveats. The scale assumes the product is held for the recommended holding period stated in the document: leaving earlier can change the outcome considerably. And the lowest value does not mean no risk: no step on the scale guarantees that.
Performance scenarios
The document shows what could happen to an invested sum under four scenarios: stress, unfavourable, moderate and favourable, over several time horizons. These are estimates built with a methodology set by regulation, based on past data.
They should be read for what they are: a way of getting a sense of the range of possible outcomes, not a forecast. The moderate scenario is not "what will happen". The most instructive column is often the unfavourable scenario, because it forces you to ask whether that result would be bearable.
Costs
The costs section separates one-off costs, on entry and exit, from ongoing costs, such as management fees and transaction costs, and from any incidental costs such as performance fees.
The most useful figure is the impact of costs on the annual return: it shows by how much costs reduce the result each year, assuming the product is held for the recommended period. It lets you compare products with different cost structures using a single number. Remember that the cost of the service provided by whoever sells or advises on the product may come on top of the costs shown.
Three questions before closing the document
Have I understood what this product invests in and who it is intended for? Is the recommended holding period compatible with when I will need the money? Do I know how much it costs in total, every year, including the cost of the service?
If the answer to any of these is no, the reasonable thing is to ask for clarification before signing. The KID was designed to be understood by people outside the profession: if it is not clear, that is not the reader's fault.
Educational and informational content only. It is not personalised financial, investment or tax advice. All investments involve risks, including the possible loss of invested capital.
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