Mutual Funds

5 things to look for in MF factsheet

BL Research Bureau | Updated on December 22, 2020 Published on December 22, 2020

If you are a do-it-yourself mutual fund (MF) investor, the monthly factsheets available on AMC websites are a good starting point to understand an MF scheme you want to invest in.

Here’s what to look for in a fund factsheet.

Investment objective: You should use the factsheet to get a quick snapshot of the investment objective of a scheme. You can also see the investment style box — a graphical representation of a fund’s strategy (value, growth or a mix of both) — and the market-cap focus (large-, mid- or small-cap stocks or a combination of these).

Portfolio: You should look at the detailed month-end portfolio. For instance, for an equity scheme, you can see the list of all the companies it has invested in, and their percentage share in the portfolio. Many factsheets also list out the top 10 sectors that the scheme has exposure to.

You can also look at the overall portfolio allocation across equity, debt and cash (and equivalents). For instance, you may not prefer equity schemes with consistently large cash holdings (10 per cent or higher).

Returns: You should use the factsheet to analyse the scheme returns. Most factsheets provide the latest one-, three-, five-year, and since-inceptions returns for a scheme and for its benchmark index.

While this is useful information, it may not be sufficient. For instance, if you want to know how a scheme performs overs three-year periods, simply looking at the latest three-year return may not give you a complete picture. You can go through the factsheets of a few years (for instance, the November factsheets for 2015-2020) to get a broad sense on a scheme’s performance overtime.

Alternatively, you may want to look at what are called rolling returns — that is all three-year returns (in this case) over a longer period such as five or seven years. Many websites offering MF fund advice offer information on rolling returns.

Portfolio Turnover Ratio: PTR is the percentage of the scheme portfolio that has changed over the past one year, and indicates the extent of portfolio churn. Low PTRs indicate that a scheme is following a buy-and-hold strategy, which also contributes to a lower expense ratio. A high PTR can indicate higher transaction (trading) costs that may impact returns, unless the frequent churn helps the scheme make well-timed entries and exists, contributing to better returns.

Standard Deviation: SD gives you some sense of the volatility of the scheme return. Higher the SD, greater the volatility. So, for instance, if a scheme has a SD of 6 per cent and an average return of 12 per cent, that means the actual scheme returns can range from 6 to 18 per cent. To understand whether the PTR and the SD for a particular scheme are too high or low, you can compare them with those of other schemes from the same category.

Gauge risk: From a risk perspective, it’s also worth looking at the risk-o-meter, a pictorial meter that indicates the risk level of a scheme.

Beginning January 1, 2021, all MF houses will have to revamp their existing risk assessment method using SEBI’s new formula-based framework, which will evaluate risk based on the portfolio composition and not simply depend on the category to which the scheme belongs. The new risk-o-meter will have six (currently five) levels of risk — low, moderately low, moderate, moderately high, high and very high.

Miscellaneous: The factsheet also carries other scheme details such as assets under management, expense ratios and exit loads (percentage of NAV deducted for investments redeemed before a certain minimum period).

While you mustn’t choose one scheme over another based on expense ratios, but rather on the consistency of returns (as returns are calculated after accounting for expense ratios), it is still worth knowing what you are paying for your returns. Many AMC factsheets also have a few pages with details on their fund managers, their experience and the performance of the schemes they manage.

While the latest month factsheet can provide you much information, it’s best to go through a few factsheets spread over a few years to gain a better understanding of the investment strategy and performance of a scheme.

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Published on December 22, 2020
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