If you have questions about a mutual fund scheme that you own or plan to purchase, one source that you can turn to for reliable information is its fact sheet. This document
contains a wealth of information and insights. Reputed fund houses
provide more information in this document
than is legally mandated. By reading it carefully, an investor can glean useful insights about a fund's past performance, the level of risk it carries, and so on. Fund houses
upload the latest fact sheet each month on their websites.
Equity fund’s fact sheet
An equity fund's fact sheet usually begins with the outlook for the markets. This contains the fund manager’s view on his expectations from the markets, and the key factors that will drive it. Reading the outlook is important because it also provides an insight into the fund manager's mind and the strategy he is likely to follow.
The fact sheet will also tell you for how long the current fund manager has been handling the fund. Always go with a fund that has been in the hands of the same fund manager for a long time. This ensures consistency in strategy. Beware of funds where there is high churn of fund managers. Each fund manager who takes charge will bring his own management style, and if each has a short tenure, it will result in a confused portfolio strategy.
The fact sheet also provides information on the sector and stock-wise allocations of the fund. When examining this data, watch out for a few things. One, the portfolio should not be too heavily concentrated in a particular stock or sector. If that is the case, the fund carries the risk of taking a heavy hit in case those stocks or sectors perform badly. Two, make sure that the fund's portfolio is aligned to its objective. For instance, a large-cap fund should not have high exposure to mid- and small-cap stocks even in market conditions when the latter are performing well. The choice of stocks in the portfolio should also not be in contrast with the fund manager's market outlook. And finally, all the funds of a fund house should not have the same stock picks. It points to lack of clear positioning for each scheme.
Next, look at the past performance of the fund vis-a-vis its benchmark. In case of an equity fund, give more weight to its long-term performance. Nowadays, not only do fund houses
provide trailing point-to-point returns, they also give returns of systematic investment plan for periods as long as 10 and 15 years.
Also available in the fact sheet is a wealth of quantitative data about the fund. A ratio like beta tells you about the fund's risks level vis-a-vis its index. A high beta is not desirable in a weak market. The Sharpe ratio tells you about the risk-adjusted return (return earned per unit of risk taken) of the fund. A low number indicates that the fund manager has taken too much risk for the return he has garnered. When compared to similar numbers of other funds, you can get an insight into where the fund stands vis-a-vis its peers. Another useful parameter you can find here is the portfolio turnover ratio, which generally varies between 15 and 50 per cent. Usually, a lower turnover ratio is desirable. Besides resulting in lower transaction costs, a fund with a stable portfolio indicates that the fund manager has clarity about the type of stocks he wants in his portfolio.
Finally, you can also look up the fund’s expense ratio. This will give you an idea of how much the fund house is charging you. In case of equity funds, the expense ratio usually varies between 1.8 per cent and 2.2 per cent. The expense ratio for both the regular plan and the direct plan is provided. This will tell you how much cost saving you can achieve by purchasing the fund directly from the fund house.
Income/debt fund's fact sheet
In case of an income fund, the fact sheet will provide you the outlook for the debt market. It will contain the fund manager's views on interest rates, yields and liquidity in that market. Again, ensure that the fund manager's fund strategy aligns with his market outlook. As in the case of an equity fund, look for consistency at the helm and longevity in the fund manager’s tenure.
Asset mix and credit exposure are other important metrics you can find in an income fund’s fact sheet. Most of these funds do take some exposure to lower-rated debt papers in their quest for higher yields. An exposure of 15-20 per cent is okay so long as the rest of the portfolio is in sovereign bonds and in papers having AA and higher rating.
As for quantitative data, look at trends in average maturity and modified duration. Funds with a higher average maturity usually have a higher yield to maturity and also benefit more in a falling interest-rate scenario. The modified duration also measures the sensitivity of bond prices to changes in interest rates. Especially when investing in dynamic bond funds, look at past trends in these two metrics. A dynamic bond fund must be truly dynamic, in the sense that its fund manager must vary the average maturity of the fund in line with his market outlook.
Don't miss out on the expense ratio of a debt fund. Avoiding funds having a high expense ratio is especially important in the case of debt funds because they tend to give you single digit returns in most years. You wouldn't want a large percentage of your returns to be taken away by a high expense ratio. Again, compare the expense ratios of the regular and the direct plan.
Finally, look at the returns of the fund vis-a-vis that of its benchmark. In case of income funds, you need not pay much heed to five-year and other longer term returns. A one-year perspective is good enough. Remember that in these funds, when you enter and exit the fund is very important and will determine the kind of returns you earn.
Repository of information
The fact sheet is the document you should turn to for reliable information about a scheme
You can find it on the fund house’s website
An equity fund’s fact sheet provides the fund manager’s outlook for the market
You can also get information like the fund manager's tenure, stock and sector allocation
Quantitative parameters like beta, Sharpe, turnover ratio, etc are available
An income fund's fact sheet contains the fund manager's view on the debt market
You can also learn if the fund has exposure to risky and lower-rated papers
Numbers like average maturity tell you how much duration risk the fund is taking
A low expense ratio is crucial in the case of income funds
The writer is CEO, Right Horizons