What should you be reading in a mutual fund fact sheet?

Fund Fact Sheet is a goldmine of information wherein you can glean deep insights about the fund that you are holding.

May 01, 2018 05:05 IST India Infoline News Service

Balance sheet
If you have invested in mutual funds then you must have surely checked out the mutual fund fact sheet. It is a monthly review statement about all the funds of an AMC that is uploaded by the AMC on its website. This is mandatory as per SEBI regulations. What you need to remember is that this Fund Fact Sheet is a goldmine of information wherein you can glean deep insights about the fund that you are holding.

In fact you can also use the fund fact sheet data to make your choice of funds.


Fund Fact Sheet pointers if you are invested in an equity fund
  • The first thing to read in an equity fund fact sheet is the equity market outlook and the CIO commentary. It gives you an insight into the thinking of the fund and you can also cross check that the strategy is in tune with the thinking.
  • Check out the portfolio of the fund. You need to look at the sector mix and ensure that it is not vulnerable to macro factors like interest rates and inflation. Also, if you are invested in a diversified equity fund, keep a tab on the extent of mid-cap and small-cap exposure of the fund.
  • The proof of the pudding is in the eating and that is what returns are all about. Don’t obsess yourself with monthly and quarterly returns. Ideally, focus on 3-5 year returns and tabulate it on a rolling quarterly basis to get an idea about consistency.
  • Is the fund manager taking too much risk? A return of 16% with 10% volatility is good but a return of 18% with 40% volatility is not encouraging. The fact sheet discloses the Sharpe Ratio of the fund, which will help you understand risk-adjusted returns.
  • Check out the expense ratio of the fund. Normally, larger the size of the fund, the lower is the expense ratio. It is the charge that gets debited to your NAV and therefore reduces your returns.
  • Check for the stability of the fund management team. That is essential for the continuity and consistency of the fund strategy. Longer the fund team has been together, the more likely they are to be in sync with the broad fund strategy.
Fund Fact Sheet pointers if you are invested in a hybrid fund
  • If you are invested in a balanced fund, focus on the consistency of the debt/equity mix. The mix can be dynamic so check the historical returns of the balanced fund over a longer period of time to gauge success of the strategy.
  • If you are invested in monthly income plans (MIP), check the fund fact sheet for the quality of debt and equity portfolio. They virtually promise regular income so they better have a liquid portfolio to generate regular returns.
  • In case of arbitrage funds, benchmark the arbitrage returns with the rate of interest you can earn on a bank FD. Also focus on the turnover ratio as a higher turnover ratio will mean higher costs and therefore lower returns on the arbitrage fund.
Fund Fact Sheet pointers if you are invested in a debt fund
  • While the standard factors like debt market outlook and the returns of the fund are material, there are 3 unique aspects of a debt fund that you need to focus in the fact sheet. Look at the bond mix in the portfolio and ensure that it is not too skewed in favour of AA rated instruments that are intrinsically risky.
  • A unique factor for debt funds is the average maturity of the debt fund, which is the weighted average maturity period of all the bond holdings. Funds with higher average maturity are more vulnerable to spikes in interest rates as they witness sharper NAV depreciation.
  • Also check the duration of the overall bond portfolio. The duration is the payback period of the fund and also measures the extent of sensitivity of the fund to interest changes. In a rising interest scenario, you must prefer short duration funds while should opt for long duration funds in case interest rates are expected to fall.
Fund Fact Sheet pointers if you are invested in an index fund
  • An index fund is normally a reflection of an underlying index like the Nifty or Sensex. How exactly is the fund fact sheet relevant to an index fund? The fact sheet for an index fund will disclose the tracking error. Normally, lower the tracking error; the better it is as it indicates that the fund is not digressing too much from the underlying index.
  • You must also look at R2 of the index fund. R2 is the square of the correlation and measures how correlated are the returns on the index fund to the returns on the index. For index funds it is better if the R2 is close to 1.
The moral of the story is that the fund fact sheet is a treasure trove of information and insights. Irrespective of the fund you hold, it is up to you how you make the best of the fact sheets!

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