How to read the mutual funds fact sheet

Table of Contents

A mutual funds fact sheet can clarify many of the questions investors may have when making an investment in a mutual fund. A mutual fund factsheet provides a thorough overview of the fund. Mutual fund investing has many advantages, which are well known. However, simply paying for them at face value is insufficient. Investors ought to be aware of how their funds are handled. They should do as much study as they can on a scheme’s strategy, performance, risks, and methods of investing the money. Many investors avoid this process because they see it as being difficult.

Mutual funds reveal a fund factsheet, which contains all the key information needed before investing, to make life simple for investors. The factsheet, which is released regularly, is a brief document that contains a wealth of information on how the fund is run.

What is mutual funds fact sheets ?

Mutual funds fact sheet is like a docucment that is sent to current investors by all fund houses. Additionally, they must make it accessible on their official websites so that potential investors can easily access it.

Importance of a mutual funds fact sheet

Some investors may fall prey to mutual fund traps due to rising investor awareness and aggressive mutual fund promotion. They may be able to choose only those schemes that fit their investment objectives and avoid others by carefully reading a factsheet that explains the advantages and disadvantages of a particular scheme.

Components of a mutual funds fact sheet

Some of the important components are covered below:

Basic Fund Information

The following basic facts regarding mutual funds are typically included in a factsheet for the fund:

Investment objective: The fund’s investment objective may be to produce capital appreciation, provide regular income, provide investors with liquidity, etc.

Category: In addition to categories like large-cap, mid-cap, small-cap, multi-cap equity scheme, conservative hybrid scheme or aggressive hybrid scheme, etc., there are also subcategories like large-cap, mid-cap, small-cap, and hybrid scheme.

Scheme type: The kind of scheme, such as an open-ended, closed-ended, or interval scheme, growth funds, income funds, liquidity funds, etc.

Assets under management (AUM): Assets under management, or simply AUM, represent the market value of all the investments a mutual fund owns.

Benchmark: Benchmark index against which the scheme’s performance can be compared.

Minimum amount: The minimum amount of money that needs to be invested for a lump sum or a Systematic Investment Plan (SIP).

Exit load: Exit load refers to the fees that a shareholder would have to pay in order to redeem mutual fund units or terminate a mutual fund scheme.

Riskometer: A riskometer that shows the degree of risk associated with the particular mutual fund. The danger level shown by the risk-o-meter points can range from low, low to moderate, moderate, moderately high, high, or very high.

Details About the Fund Manager

Information about the qualifications and skills of the fund manager is provided in the mutual fund factsheet. It could also include details on previous results for the funds the fund manager has handled. Knowing all of these is crucial because fund managers will examine market trends, develop investment plans, and guarantee legal compliance. They will choose investments that could significantly affect the results produced by mutual funds. Fund managers who have both education and experience are likely to make wiser investing choices.

Portfolio Allocation

Money from a pooled source is invested in a variety of assets and industries through mutual funds. Important details about portfolio allocation can be found in the mutual fund factsheet, which can provide the answers to the following queries:

What assets are the funds being invested in?
What percentage of net assets are invested in which assets/security?
What industries or sectors are the funds being invested in?
What percentage of net assets is invested in which industries?
What percentage of net assets is invested in which companies?

Performance Analysis

The specifics of a mutual fund’s past performance are an essential component as well. This section typically compares scheme returns, SIP returns, returns versus the benchmark, and the market’s total return over the course of one, three, five, or 10 years or longer.

Important ratios of mutual funds fact sheet

The important ratios listed below are those in a mutual funds fact sheet that can affect the performance of the relevant scheme or fund.

Standard Deviation

The standard deviation of a mutual fund is a measure of its volatility. It demonstrates how much the fund’s returns can vary from its typical returns. The standard deviation should be examined because it represents the risk level and potential returns of the particular mutual fund. To make a more informed investment choice, one can also compare the standard deviation of the funds in the same category.

Beta

The volatility of mutual fund returns in relation to the benchmark is measured by beta. Beta displays the swings in mutual fund returns relative to market volatility, while standard deviation tends to represent the overall risk. One can check the beta of a mutual fund to know whether it is suitable for risk tolerance levels.

Sharpe Ratio

The return produced by a mutual fund over a risk-free rate is measured by the Sharpe ratio. It shows if a mutual fund is doing well or poorly given the risk it entails by nature. To evaluate which mutual fund can deliver greater returns for the level of risk involved, one can analyze and compare the Sharpe ratios of mutual funds offering similar returns or belonging to similar categories.

R-squared

A metric for analyzing a fund’s performance in relation to the benchmark is the R-squared ratio. Its value runs from 0 to 100 bps, with a number close to 100 indicating a strong correlation between the performance of the fund and the index it tracks, as well as the opposite.

Expense Ratio

The expense ratio compares the mutual fund’s actual costs to the overall asset value of the fund. The sum of the costs includes management, distribution, and administrative charges. The expense ratio might reveal which fund uses fewer resources to manage the same assets when two funds have similar asset values.

How to interpret a mutual fund factsheet?

Here are a few things to keep in mind when we read the mutual fund factsheet:

Investors might think about investing in the fund if its goals, level of risk, and anticipated returns are consistent with their investment goals.

The performance of the mutual fund portfolio could be impacted if the fund managers lack the necessary training or expertise.

The performance of the fund can be impacted by abrupt or frequent changes to the management team.

Investors can have a better understanding of the company’s success by contrasting the various characteristics of a mutual fund with its historical performance and that of other funds in a comparable category.

Key ratios and their significance

The Mutual Funds Fact Sheet includes some risk-return strategies that should be considered after learning about their purpose and effects. A combined view should be the deciding factor rather than focusing on each one of the ratios separately. Some of these include

Ratio	Definition	Importance	Measure
Standard Deviation (SD)	The standard deviation serves as a measure of the fund’s return volatility in relation to the mean or average.	SD varies in direct proportion to the portfolio’s risk.	Generally, a lower SD is better
Beta	This information reveals the fund’s volatility in relation to a benchmark.	Usually, a beta of 1.2 means that the fund will be 20% more volatile than the benchmark index	Generally, a lower Beta is better and denotes a lower risk.
Sharpe Ratio	It is a measure of how well the fund has performed in relation to the risk it has taken. It is the return above the return on a risk-free investment.	Better risk-adjusted returns are associated with greater Sharpe ratios. It is an effective metric for contrasting two funds with comparable returns.	Generally, a higher Sharpe ratio is better.
R-Squared	A high R-squared value between 85% and 100% shows that the fund’s performance closely tracks the benchmark.	A fund that has an R squared of 96 is nearly identical to the benchmark.	Typically, the higher the better.
Total Expense Ratio	It is a fund management cost. Along with other administrative expenses, it also includes management and distribution fees.	A fund with a lower AUM fund will have a higher TER. Funds having a higher TER, meanwhile, shouldn’t be the only criterion used because they can produce returns that are above average.	Usually, a low expense ratio is definitely better.
Portfolio Turnover Ratio	It is a measure of the portfolio turnover of the fund. It is calculated as a percentage by dividing the lower the total amount of securities bought or sold by the average AUM.	Aggressive trading means high costs, and thus higher expenses translate into lower returns.	Lower the better.
Tracking Error	Its definition is the difference between fund returns and benchmark returns, and its standard deviation is the differential return. The deviation between the differential returns and the average differential return is measured.	The most crucial ratio to consider when picking an index fund is this one. Lower tracking error funds offer returns that are in line with the benchmark indices.	Lower the better
Information Ratio	It is an indicator of the fund’s risk-adjusted performance. It is calculated by dividing the excess return over the benchmark by the tracking error.	The information ratio is frequently used to assess the competency of fund managers. It calculates the difference between the manager’s assumed risk in relation to the benchmark and the predicted active return of the portfolio. The manager performs better when the information ratio is higher. It demonstrates the manager’s reliability in producing top-tier risk-adjusted performance.	Higher the better

Other fund facts

There are many more intriguing data points in the mutual funds fact sheet. Here is the snapshot of the fund’s other facts:

We will skip the first section because it is the investment objective, which we have already discussed. The second thing to consider is the fund’s benchmark. Essentially, a mutual fund scheme should benchmark itself to an index. This is necessary to assess the fund’s performance over time. A mutual fund needs to use the right benchmark. A small-cap fund, for instance, is benchmarked against a small-cap index. If the benchmark is inappropriate, such as when a small cap mutual fund is benchmarked against a large-cap index, it is nearly considered to be mis-selling.

Open-ended: When an AMC launches a fund, they have the choice to either let it operate for a specific amount of time or keep it continuing indefinitely. For instance, Someone could launch a fund today and let it run for three years; at the conclusion of the third year, the fund would no longer exist, and the investor would be required to get his money back (along with the profit or losses). Funds having a time frame like this are referred to as “closed-ended funds.” An open-ended fund is one that doesn’t have an expiration date.

Equity: The asset class in which the mutual fund invests is indicated by this term. As we are aware, equity refers to the shares listed in the market. Another asset class is debt, which may consist of either corporate debt or government-issued debt.

Fund manager: The fund manager’s experience handling portfolios is crucial for the investment because they are in charge of managing the fund’s performance and corpus. The factsheet elaborates on the fund manager’s experience and credentials and gives us a summary of their track record in light of this.

Allotment date: The fund’s operations officially started on the allocation date. One can tell roughly how old the fund is based on the allotment date. It doesn’t really matter, although an older fund is a little bit easier to analyze than a fresh fund.

Industry allocation and sector-related information: By their very nature, mutual fund schemes diversify well by investing in a variety of stocks and industries. A fund is generally seen as volatile and riskier if its allocation is heavily weighted toward a small number of industries. It does, however, present a greater opportunity for profit. Through weightages, the factsheet illustrates sectoral allocation. Examine the sector allocation to have a deeper understanding of the fund’s performance. Cyclical industries like those in automotive, cement, banking, capital goods, etc. are sometimes viewed as risky yet offer significant returns in bull markets, particularly in the early and mid stages. In a similar manner, defensive industries like FMCG, healthcare, pharmaceuticals, etc. sometimes outperform throughout bull and bear market peaks.

Conclusion

Investing in mutual funds can be a risky business at times. It entails the examination of several qualitative and quantitative variables over a range of time periods. The financial objectives, level of risk tolerance, and investment horizon should also be considered. A fund factsheet is one of the best guides containing all the information necessary for analyzing the fund and taking informed decisions.

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