Understanding Equity Mutual Fund Factsheet

Fund Factsheet – Definition

A Fund factsheet is an easy to understand general information document about a particular Mutual fund scheme which helps the investor in making a well-informed decision. It provides answers to questions like ‘where is the money being invested’, ‘which stocks were added or removed during a particular time period’, ‘who is the Fund Manager’, ‘how has the fund performed’ etc.
Fund Houses are required to disclose the factsheets on a monthly basis.

An investor should always endeavour to get an answer to these questions before investing in a particular Mutual Fund. For both potentials as well as existing investors, the fund factsheet is a key source of information, numbers, terminologies and disclosures related to the scheme.

 

How to read a fund factsheet

The factsheet can be divided into broad categories & subcategories:

General Information

This provides the scheme’s basic information like :

Objective
Category – if it is  Large Cap, Small Cap, Mid Cap, Multi Cap etc
Net Asset Value (NAV)
Plan options – Direct, Growth, Dividend etc
Assets Under Management (AUM)
Benchmark Index like – NIFTY 50, S & P BSE 500, NIFTY Small-cap 100 etc
Minimum amount  (SIP & Lump sum) & the Exit-load

There is scheme Riskometer or the Product Label which indicates level of risk associated with the scheme.
The risk is depicted as –
a) Low
b) Moderately Low
c) Moderate
d) Moderately High
e) High

Most of the equity funds are categorized as Moderately High or High due to the volatility associated with markets.
Product Label highlights the suitability of the scheme for investors.

 

Fund Manager Details

This provides information about the Fund Manager.

The details like educational qualification, experience and other funds being managed (if any) by the Fund Manager are available in other pages. Importance of Fund Manager – An experienced and stable Fund Management team or Fund Manager with a proven record goes a long way in winning investor confidence. A change in Fund Manager can be indicative of a material impact on the fund’s strategy and also on its performance.

 

Portfolio – Asset Allocation

An equity Mutual Fund constitutes stocks from different sectors and is a mix of securities, as per its objective. It is a well-diversified portfolio in itself comprising of a basket of assets.  The investor can analyse the portfolio to understand as to how and where the money is being invested and also, in what proportion.

What does Portfolio indicate?

Sector-wise and Company wise breakup – it depicts the Net Asset percentage as a whole and also the total concentration/exposure.
There are some fact sheets which give the number of shares along with their market value and net asset percentage.

Asset Allocation – this represents the total stock holdings, cash position and debt investments or other assets. The cash position also gives an insight into the Fund Manager’s market outlook. Depending on the market cycle, the cash position can prove to be beneficial or vice versa.

Stock Holdings – Generally, Top 10 Holdings is highlighted prominently with the percentage weight

It is recommended to check for the concentration of companies or sectors in the portfolio – this is important from the risk mitigation perspective and also for ensuring proper diversification.

 

Performance Snapshot

Most of the Fact sheets provide performance data for various time periods – 1 year and 3/5/10/15 years and since inception.

The investor can compare & check –
i)  Scheme returns  ii)  SIP returns   iii)  Returns v/s Benchmark    iv)  Market’s overall returns

Although note that past performance is not a guarantee for similar or continuous performance in the future.

 

Key Return- ratios, volatility measures & significance:

The Factsheet contains volatility measures, risk-return ratios which are quite vital for the evaluation of a fund. These ratios/measures should be viewed as part of the overall picture and not in isolation:

1/ Standard Deviation: 
Definition – Standard Deviation (SD) is used for measuring the volatility of the scheme’s returns in comparison to its average or the mean
Significance – SD is proportional to the risk associated with the portfolio
Impact– A lower SD is better

2/ Sharpe Ratio
Definition- It is the return over and above the risk-free return (For example Govt Bond Rate or Bank Fixed Deposit rate) divided by the Standard Deviation
It measures the fund’s performance in comparison with the risk undertaken.
Significance – A higher Sharpe ratio signifies better risk-adjusted returns and is a good parameter for comparing two funds with similar returns.
Impact- A higher Sharpe Ratio is better

3/ Beta
Definition – Beta is a measure of the volatility of the fund as compared to its Benchmark
Significance– A beta of 1.1 means that the fund will be 10% more volatile (and vice versa) than the benchmark index
Impact – Lower Beta is better and it also means lower risk

4/ R-Squared
Definition- R-squared between 80-100% signifies that the fund’s performance mirrors the benchmark closely
Significance- A fund with R-squared of 90 means it closely corresponds with its benchmark
Impact- Higher the R-squared, the better it is

5/ Expense Ratio or Total Expense Ratio (TER)  
Definition– It is the cost of managing a scheme or fund. It includes management, marketing and other administrative costs
Significance- A fund return is an expectation, but the cost you pay is real and even if the fund does not perform the costs will need to be paid to the fund management team.
Impact – Low Expense Ratio is definitely better
Read more here: Total Expense Ratio

6/ Portfolio Turnover Ratio (PTR)
Definition – It measures the churn in the fund’s portfolio. It is arrived at by dividing the lower of total securities bought or sold by the scheme’s average AUM and is represented as a percentage..
Significance- Frequent trading involves cost and higher expense means lower returns
Impact – Lower the better

 

Conclusion

An equity Mutual Fund is a diversified investment vehicle. An informed choice enables the investor to align financial goals with the portfolio. Mutual Funds are professionally managed by experts in their area. Still, choosing which fund to invest in sometimes looks like a tedious task.

In such a situation, a fund factsheet is the primary source of information for both first time and experienced investors. It is always better to be an informed and aware investor.

 

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

 

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