Understanding Mutual Funds Data in Detail
Mutual funds provide a wealth of information about their portfolios and historical performance to help investors make informed decisions. However, navigating and interpreting this data can be overwhelming for both new and experienced investors.
We've broken down key terms and definitions that every mutual fund investor should know. Understanding these concepts is the first step toward making confident and well-informed investment choices.
Key Terms Every Investor Must Know
The list below shows the key terms in mutual funds that every investor must know before investing.
1 Day Returns
The percentage change in the mutual fund’s value over the last day. This figure is updated daily based on the latest Net Asset Value (NAV), which functions similarly to a stock’s share price.
Launch Date
The date on which the fund was initiated. Older funds are often considered more reliable, as they have sustained performance over time.
Category and Sub-Category
Category: Reflects the fund’s broader investment strategy, such as equity, debt, or hybrid.
Sub-Category: Refines the classification further, like mid-cap, small-cap, or equity-oriented hybrid funds, based on portfolio holdings and objectives.
Groww Rating
A proprietary rating based on the fund’s historical performance and other available data.
Returns 3Y
A user would have earned annualised returns if the person invested in the fund three years ago, updated daily using the latest NAV.
Risk
Measured using Standard Deviation. It reflects how much the fund's returns deviate from the average. Risk is graded on a 7-point scale:
- Very Low Risk: Standard Deviation <1%
- Very High Risk: Standard Deviation >20%
At Groww, we use weekly rolling monthly returns for risk calculation. We recalculate the risk of mutual funds every week to ensure our investors get the latest risk profile to make necessary changes to their portfolios.
Min SIP Amount
The fund itself determines the minimum monthly investment required for a Systematic Investment Plan (SIP) in the mutual fund.
Expense Ratio
A percentage of the fund's total assets is deducted daily to cover management, distribution, and operational costs. It typically ranges between:
- Equity Funds: 1–3%
- Debt Funds: 0.1–1.8%
These details are updated monthly based on the mutual fund data.
AUM (Asset Under Management)
The total value of all investments made in the fund as of the end of the previous month.
SIP Returns
Displays the performance of the fund when invested via a monthly SIP. Users can simulate SIP investments over custom timeframes and amounts to assess historical performance.
Trailing Returns
Shows the fund’s performance over a specified timeframe (e.g., 3 years) compared to its benchmark index. Users can adjust the investment and evaluation periods.
Historical Returns
The funds and their benchmark are shown in 1-year, 3-year, and 5-year historical returns. Apart from these, Groww also gives you the following data points, calculated weekly based on rolling monthly returns:
- Mean Returns: The average annualised return over the last 3 years, calculated using weekly rolling monthly data.
- Standard Deviation (Std Dev): Measures risk by evaluating return variability.
- Sharpe Ratio: Assesses risk-adjusted returns by comparing excess returns to the fund’s risk (Std Dev).
Holding Analysis
Mutual funds invest in varied market securities. The performance of the underlying securities determines the performance of the mutual fund. Some of the critical data points to explore here are:
- Concentration Measures: Proportion of total holdings in top securities (Top 5/Top 20).
- Valuation Measures (Equity):
- P/E: The average trailing P/E ratio will be lower for better-performing mutual funds. The P/E ratio is the equity market cap divided by the net profit in the past 12 months.
- P/B: Preferably, equity securities' average trailing P/B ratio should be lower. The P/B ratio is the market cap of equity divided by the latest available net worth.
- Turnover: Refers to the churn on the equity portfolio in the last 12 months.
- Valuation Measures (Debt)
- Yield to Maturity (YTM): Considering that all debt securities will be held until maturity, YTM is the average interest rate for investors at today's market price.
- Average Maturity: Weighted average maturity of all debt securities. A lower value is preferred.
- Modified Duration (MD): Corresponds to the sensitivity of debt securities to the interest rate. The value of debt securities will decrease by 1% if MD is 1 and the interest rate increases by 1%.
Charts and Allocation Metrics
These are crucial in evaluating and understanding fund performance:
- Asset Allocation: This represents the fund's total holdings distribution across different asset classes such as debt, equity, and cash (including money market instruments and gold). It helps investors understand the fund's overall investment strategy and risk profile by highlighting its allocation across asset classes.
- Equity Sector Allocation: This breaks down the equity portion of the fund’s portfolio by sectors, such as Financial Services, IT, and Healthcare. It highlights the sectoral diversification of the equity holdings, enabling investors to evaluate exposure to specific industries and their associated risks or growth potential.
- Equity Size Allocation: This categorises the equity holdings based on the market capitalisation of the companies, such as Large Cap, Mid Cap, or Small Cap stocks. It helps investors understand the size and risk profile of the companies in the fund's equity portfolio. Large-cap stocks tend to be more stable, while small-cap stocks may offer higher growth potential but with greater risk.
- Debt Sector Allocation details the proportion of the fund’s debt investments allocated to different sectors, such as Financial Services or Manufacturing. It provides insights into the sectoral diversification of the debt portfolio, helping investors assess the stability and risk associated with fixed-income investments.
- Debt Credit Rating: This provides a breakdown of the debt securities in the portfolio based on their credit ratings, which indicate the likelihood of default. Ratings range from high-quality (e.g., Sovereign, AAA, A1+) to lower quality or higher risk (e.g., D, A4). Credit ratings allow investors to gauge the quality and risk of the debt holdings. High-rated securities (e.g., Sovereign, AAA) are considered safer, while lower-rated securities may carry higher yields but come with increased risk.
Key Factors for Evaluating Mutual Funds
Understanding key evaluation factors can help you make better investment decisions when selecting a mutual fund. Here is an in-depth look at the most important factors to consider:
AUM (Asset Under Management)
AUM, or the total market value of assets managed by a mutual fund, reflects its scale and operational efficiency. Funds with low AUM may struggle with stability. At the same time, those with excessively high AUM may face challenges in achieving high returns due to limited flexibility in pursuing small, high-growth investments. A balanced AUM size ensures stability and efficient management, allowing the fund to remain agile and generate optimal returns.
Age of the Fund
The age of a mutual fund indicates the time it has been in operation. Funds with a history of at least 5 years offer valuable performance data across multiple market cycles, enabling investors to analyse consistency and resilience. On the other hand, newer funds lack sufficient historical data, making it harder to evaluate their strategies and risk management during market volatility. Opting for an older fund with a solid track record provides greater confidence in its reliability.
Historical Returns
Historical returns show how well a fund has performed over specific periods, such as 1 year, 3 years, and 5 years. A fund's ability to consistently outperform its benchmark (e.g., Nifty, Sensex) across different timeframes indicates its effectiveness in delivering value to investors. By analysing returns during various market conditions, you can assess whether a fund has the adaptability needed to thrive in changing environments.
Risk
Risk in mutual funds refers to the variability in returns, often measured by metrics like Standard Deviation. While higher-risk funds may promise greater returns, they can also lead to significant losses during market downturns. Ensuring a fund's risk aligns with your financial goals and risk tolerance is crucial. Additionally, comparing the fund's volatility with its benchmark can provide insights into its performance stability relative to the broader market.
Sharpe Ratio
The Sharpe Ratio is a mathematical computation measuring how much extra return an investor can get from an investment for every unit of risk. It is s calculated by subtracting the risk-free rate of return from the expected rate of return and then dividing the resulting figure by the standard deviation. A higher Sharpe Ratio indicates that the fund is generating better returns per unit of risk, making it a desirable choice for investors. Funds with a Sharpe Ratio above 1 are considered efficient, as they deliver superior risk-adjusted returns compared to peers and benchmarks.
Investment Objective
A mutual fund’s investment objective defines its primary focus—whether it aims for capital growth, income generation, or a combination of both. Ensuring the fund’s objective aligns with your financial goals is critical to achieving your desired outcomes. For example, growth-oriented funds may be ideal for long-term wealth creation, while income-focused funds are better suited for regular payouts.
Tax Implication
Understanding the tax implications of mutual fund investments is essential to avoid unexpected liabilities. Different types of funds have varying tax treatments, such as capital gains tax for equity and debt funds. Equity funds typically attract lower tax rates for long-term holdings, while debt funds may be subject to higher taxes, depending on the holding period. Always consider tax efficiency when selecting a fund.
Minimum Investment
Each mutual fund sets a minimum amount required for initial and subsequent investments. It is essential to review these limits to ensure they align with your budget and investment strategy. For instance, Systematic Investment Plans (SIPs) often have lower minimum amounts, making them accessible to investors with smaller budgets.
Asset Management Company (AMC)
The reputation and expertise of the fund's AMC play a crucial role in its success. A reliable AMC with a strong track record, experienced management, and robust research capabilities is more likely to deliver consistent performance. Reviewing AMC's history and investment philosophy can provide confidence in its ability to manage your money effectively.
Fund Manager
The fund manager makes investment decisions and executes the fund's strategy. Their experience, expertise, and past performance can significantly impact the fund's success. It is important to research the manager's credentials and track record to ensure they can navigate market conditions and deliver strong results.
Exit Load
Exit load is the fee mutual funds charge when investors redeem their holdings before a specified period. This fee can reduce your overall returns, especially if you plan to exit the fund early. Reviewing the exit load structure beforehand allows you to avoid unnecessary costs and align your investment horizon with the fund's requirements.