What Is A Mutual Fund Fact Sheet?

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?  

An investor should seek answers to these questions ‘before’ arriving at a decision to invest in a particular Mutual Fund. The mutual fund factsheet hence, is a  vital source of information, facts, and figures, disclosures and terminologies which 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 And Their Analysis

Let’s see a breakdown of information available in the fund factsheet regarding the fund one by one:-

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 Riskometer gives an indication of the level of risk associated with the scheme.

It is categorized as –

a) Low

b) Moderately Low

c) Moderate

d) Moderately High

e) High

Equity funds are generally categorized under Moderately High and High categories signifying the volatility associated with markets. Product Label highlights the suitability of the investment for investors.

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. 

Portfolio–Composition, And 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 tells you about:-

1. Asset Allocation – this gives a detailed breakup of the stock holdings, debt investments, and cash or other assets. The cash holding percentage can be an important tool to judge a fund manager’s strategy as it can act as a positive or negative across market cycles.

2. Stock or Equity Holdings – this highlights the Top 10 Holdings under the scheme with their percentage weight 

3. Sector and Company allocation – this gives the level of concentration of stocks with net asset percentage. Some fact sheets give the number of shares, their market value along with the net asset percentage.

From diversification and risk mitigation perspective, it is important to check the concentration across companies and sectors.  

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 – 

i) Scheme returns

ii) SIP returns

iii) Returns against the Benchmark

iv) Market’s overall returns  

It enables an investor to taking a better view and to make an informed choice. It is important to note that past performance does not translate to similar continuous performance in the future.

 Key Ratios And 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:-

RatioDefinitionImportanceMeasure
Standard Deviation (SD)Standard Deviation is a measure of the volatility of the fund’s returns in comparison to its mean or averageSD is proportional to the risk associated with that portfolioA lower SD is better
BetaThis tells us how volatile the fund is compared to a benchmarkA beta of 1.2 means that the fund will be 20% more volatile than the benchmark indexLower Beta is better and denotes lower risk
Sharpe RatioIt 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 SDA higher Sharpe ratio means better risk-adjusted returns. It is a good measure for comparing two funds with similar returnsA higher Sharpe ratio is better
R-SquaredA high R-squared between 85-100% indicates that the fund’s performance follows the benchmark closelyA fund with R-squared of 96 means it is almost a replica of the benchmarkHigher the better
Total Expense Ratio (TER) or Expense RatioIt is the cost of fund management. It includes management and distribution fee and other administrative costsA fund with lower AUM will have high TER. However, TER should not be the sole criteria-funds with higher TER can give above-average returnsLow Expense ratio is definitely better
Portfolio Turnover RatioIt is a measure of the churn in the fund’s portfolio. It is a percentage taken by dividing the lower of total securities purchased or sold by the average AUMAggressive trading means high costs and thus higher expenses translate into lower returnsLower the better

 

 Conclusion

Although Mutual Funds are managed by professionals who have expertise in the area, aligning financial goals for achieving desired results is what an investor should aim for. 

Choosing a Mutual Fund might look like a task, but reading a fund fact sheet correctly gives an edge to the investor.  A Fund Fact sheet gives a holistic view and helps the investor make an ‘intelligent choice’.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

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