Mutual Fund Factsheet : Key Information It Holds And How To Read It
Do you know where your Mutual Fund is investing your money in or which stocks and/or sectors were added and which were removed after you invested in the fund? Do you know who your fund manager is and how did he perform in the past?
What Is a Mutual Fund Fact Sheet?
An investor should seek answers to these questions ‘before’ arriving at a decision to invest in a particular Mutual Fund. The Factsheet of Mutual Fund hence, is a vital source of information, facts, figures, disclosures, and terminologies that an investor should be aware of regarding the fund he wants to invest in.
Fund houses are stipulated by the Securities and Exchange Board of India (SEBI) to disclose certain specific information and thus fact sheets are to be made available on a monthly basis.
Components Of the Mutual Fund Fact Sheet & Their Analysis
Let's examine each piece of data in the Fact Sheet Mutual Fund that is available one by one and understand what is mutual fund fact sheet analysis:
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Basic Fund Information
This includes the scheme’s objective, category (Large, Small, Mid, Multi-Cap, etc), Net Asset Value (NAV), Plan options – Direct, Growth, Dividend, etc, Assets Under Management (AUM)-total money aggregated for investment, Benchmark (NIFTY 50, NIFTY Midcap 150, NIFTY 200 TRI, etc), minimum amounts (for lump sum & SIP) & exit load.
The Risk-o-meter indicates the degree of risk associated with the plan.
It is classified as–
- Low
- Moderately Low
- Moderate
- Moderately High
- High
Equity Funds are generally categorized under Moderately High and High categories signifying the volatility associated with markets. The Product Label highlights the suitability of the investment for investors.
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Fund Manager Details
This provides information about the Fund Manager’s experience, qualification, and performance details of other funds managed (if any).
A stable, experienced, and long-standing Fund Management team or Fund Manager with a good track record helps in instilling confidence. It helps if the systems and processes are well defined. Any change in team or Fund Manager should be looked into with some caution.
A sudden exit of the Fund Manager or frequent changes in the Fund Management team can have a material impact on the fund’s performance and/or strategy.
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Portfolio – Composition & Characteristics
A Mutual Fund by design is a well-diversified portfolio or basket of different assets. The portfolio composition is one of the most important tools for analysis-the investor knows exactly where the money is being invested, in what proportion, and what amount is idle (cash).
Portfolio serves to inform you about-
- Asset Allocation – Provides a detailed breakdown of the assets, including cash and other assets, debt investments, and stock holdings. Since it can have a positive or negative impact throughout market cycles, the cash holding percentage can be a useful tool for evaluating a fund manager's strategy.
- Stock or Equity Holdings – This section lists the Top 10 Holdings according to their percentage weight for the Scheme.
- Company & Sector Allocation – The allocation of companies and sectors reveals the level of stock concentration based on net asset percentage. The number of shares, their market value, and the net asset percentage are all provided in some fact sheets.
(It is crucial to examine the concentration across businesses and industries from the perspectives of diversification and risk mitigation.)
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Performance Analysis
The Fact sheet provides historical performance data for different time periods - since inception, 15/10/5/3 years, and 1 year. This is depicted with an illustration to compare –
- Scheme Returns
- SIP Returns
- Returns again the Benchmark
- Market’s Overall Returns
It enables an investor to take a better view and make an informed choice. It is significant to remember that past performance does not guarantee ongoing success in the future.
Key Ratios & Their Significance
The Fact Sheet contains certain risk-return measures that should be taken into consideration after understanding their role and impact. However, none of the ratios should be considered in isolation – a consolidated view should be the guiding force.
Some of these are –
|
Ratio |
Definition |
Importance |
Measure |
|
Standard Deviation (SD) |
Standard Deviation is a measure of the volatility of the fund’s returns in comparison to its mean or average. |
SD is proportional to the risk associated with that portfolio. |
A lower SD is better. |
|
Beta |
This tells us how volatile the fund is compared to a benchmark. |
A beta of 1.2 means that the fund will be 20% more volatile than the benchmark index |
Lower Beta is better and denotes a lower risk. |
|
It is a measure of the fund's performance in comparison to the risk undertaken. It is the return over and above the risk-free return (For example Bank FD rate) divided by the SD. |
A higher Sharpe ratio means better risk-adjusted returns. It is a good measure for comparing two funds with similar returns. |
A higher Sharpe ratio is better. |
|
|
A high R-squared between 85-100% indicates that the fund's performance follows the benchmark closely. |
A fund with an R-squared of 96 means it is almost a replica of the benchmark. |
Higher the better. |
|
|
Total Expense Ratio (TER) or Expense Ratio |
It is the cost of fund management. It includes management and distribution fees and other administrative costs. |
A fund with a lower AUM will have a high TER. However, TER should not be the sole criteria-funds with a higher TER can give above-average returns. |
A Low-Expense ratio is definitely better. |
|
It is a measure of the churn in the fund's portfolio. It is a percentage taken by dividing the lower total securities purchased or sold by the average AUM. |
Aggressive trading means high costs and thus higher expenses translate into lower returns. |
Lower the better. |
Conclusion
Investors should strive to align their financial goals with desired outcomes, even though Mutual Funds are managed by experts in the field. Although selecting a Mutual Fund may seem difficult, investors can gain an advantage by properly reading the Fund Fact Sheet.
A Fund Fact Sheet provides a comprehensive overview and aids the investor in making ‘intelligent decisions.’
Happy Investing!
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.