Understanding The 'Fact Sheet' Of Mutual Fund

When it comes to mutual funds, the 'fact sheet' is one of the reports required to be published by the fund houses every month. So, what does the fact sheet mean for the investors? If we go by the bare definition of a fact sheet, it is a paper giving useful information about a particular issue, especially the one debated on a television/radio programme. However, when it comes to mutual funds, fact sheet means a document which gives you valuable information about a particular mutual fund scheme.



If you have invested in a mutual fund, then you may have definitely checked the fact sheet of the scheme on the AMC's (Asset Management Company's) website. It is a review statement which is prepared and uploaded by fund houses every month on their respective websites. As per SEBI's (Securities and Exchange Board of India's) regulations, it is mandatory on the part of AMCs to do so. Fact sheet is one of the most important documents for an investor, as it gives detailed information pertaining to a particular fund. In fact, you may also use the fact sheet to make investment decisions.

As you might have understood what a fact sheet means, now let us understand what all things to look for in a fact sheet. This will differ from category to category.

What to look in a fact sheet of equity funds?

First, you should read the equity market outlook and the commentary given by the CIO (Chief Investment Officer) of the respective fund house. It will give you an overall picture as to where the markets are heading, the fund house's strategy and whether the strategy is in line with your thinking.

The next thing you need to do is to look at the investment portfolio of the fund. This will tell you the companies in which the fund has invested and in what proportion. You will also get to know the sectors towards which the fund is inclined. Also, if you are invested in a diversified equity fund which can invest across marketcaps with no restrictions, look at the extent to which it has exposure to mid-cap and small-cap companies.

The fact sheet will also show you the most 'interesting' part, that is, the returns. Don't get obsessed with the monthly and quarterly returns and don't take decisions on the same. Ideally, if you are investing in equity funds, then your focus must always be on the long-term with minimum time horizon of 5 years.

The fact sheet shows various statistical parameters such as Sharpe ratio, standard deviation, beta, etc. of the fund, which will help you understand the amount of risk the fund manager is taking to generate returns.



You will also find the expense ratio of the fund. Generally, the larger the fund's AUM (Assets Under Management), the lower the expense ratio. Expense ratio is nothing but the charge that gets deducted from the fund's NAV (Net Asset Value), resulting in the reduction of returns.

Look at the stint of the fund management team. It is an important thing to look for. More the stability, more it justifies the returns generated. For instance, if the fund manager has changed and the new fund manager has just completed one year, then looking at the 3-year and 5-year returns does not make sense.

What to look for in a fact sheet of debt funds?

The factors like debt market outlook, CIO's commentary and the returns provided by the fund are important. However, there are three things to look at in the fact sheet of debt mutual funds. You should look at the debt securities and instruments in the portfolio along with their weightages and ensure that the fund is not too much inclined towards low rated instruments or to a single group of companies, which are inherently risky.

Another factor to look for in the debt fund is its average maturity. Average maturity of a debt fund is the weighted average maturity period of all the holdings in the portfolio. Debt funds with higher average maturity are more vulnerable to the rise in the interest rates as they may lead to sharp fall in the NAV.

Also, look at the Macaulay duration of the overall portfolio. The Macaulay duration of the fund is nothing but the payback period of the debt securities or instruments in the portfolio. It also measures the sensitivity of the fund to interest changes. In a scenario where the interest rates are rising, you must prefer short duration funds and, conversely, you should go for long duration funds if the interest rates are falling.

What to look for in a fact sheet of hybrid funds?

If you are invested in a balanced fund, be it conservative or aggressive, then apart from the standard parameters, take a look at the equity and debt mix. With the recent recategorization of mutual funds by SEBI, there are minimum limits set for the equity and debt portion. Even then, the mix can be dynamic in nature, so have a closer look at the historical returns over a longer period of time to understand how the strategy works.

If you are invested in MIPs (Monthly Income Plans), they promise you regular income, for which they must have better liquidity to fulfil the same. So, look at the companies in which the equity portion is invested along with the debt securities. In the case of debt securities, look at the things as explained in what to look for in the debt funds section.

In case you are invested in an arbitrage funds, then compare the returns from arbitrage funds with that of interest that you can earn on FD of bank. Also, have a closer look at the turnover ratio as a higher turnover ratio means higher costs and, in turn, lower returns.

So, you are now well-equipped with the concept of the fact sheet and you also understand what all things to look for in a fact sheet. This will eventually help you while making decisions pertaining to investing or exiting from a particular fund. However, let it be understood that you should not just rely on the fact sheets for making decisions. The decisions to enter or exit any mutual fund must be based on the risk profile, financial plan and any change in the fundamental attribute of the fund. 

This is the nineth article of the knowledge series sponsored by Sundaram Asset Management Company, which will cover various topics important for your financial well-being.