Reading A Fund Factsheet

Prior to investing in any mutual fund, an investor must necessarily go through the details provided in its factsheet. Here are some guidelines about what to look out for

Investment in mutual funds is less risky than direct investment in stocks. This is because investment in mutual funds gives you benefit of diversification, allows investing in a disciplined manner via a systematic investment plan (SIP) and offers the advantage of having an expert to manage the funds. Also, mutual funds offer a gamut of funds to suit different investment needs. Further, they are well-regulated by Securities and Exchange Board of India (SEBI) that makes them less vulnerable to any malpractices as is evident in some of the Ponzi schemes.

However, when you consider investing in mutual funds, it is important to know a few things beforehand such as the qualification and experience of the fund manager, where your money is getting invested, what are the fees and charges, risk metrics, fund performance, etc. Factsheet is the document which helps you understand these things. Therefore, before you consider investing or even after investing in any mutual fund scheme, it is important to check out its factsheet. Despite the guidance provided by Association of Mutual Funds in India (AMFI), SEBI has observed that uniformity was lacking in the information provided by the fund houses in their factsheets.

Therefore, SEBI introduced a new factsheet format in October 2015. Being a sensible investor, to ascertain the genuineness of the investment pitch made by your mutual fund distributor, reading the factsheet of the scheme is crucial. There are various details that tersely capture the various aspects of a fund such as the fund's investment objective, portfolio and essentially its performance with respect to its benchmark. Therefore, it is crucial to know how to read a fund's factsheet.

Understanding the Factsheet
A fund factsheet may be considered as the Bible for potential as well as existing investors. It helps you to answer the most important questions you seek to know before and after investing. As for instance, questions such as where the mutual fund is investing your money or which stocks got added and which were removed after you invested in the fund. Who manages the fund and how has he performed in the past? Answer to all these queries can be found in a factsheet. Hence, a mutual fund factsheet is a document that contains vital source of information, facts and figures, disclosures and terminologies which you as an investor should be aware of before investing in any fund. SEBI has made it mandatory for all the fund houses to disclose certain specific information in the form of a document which should be made available on a monthly basis.

Basic Fund Information
The basic information of a fund includes the fund's investment objective, its category (equity, debt, hybrid, etc.), its subcategory (large-cap, mid-cap, short duration, gilt, aggressive hybrid, etc.), net asset value (NAV) as on date and expense ratio of direct plan and regular plan. Besides, it also has details about the fund's assets under management (AUM), its benchmark (Nifty 50, Sensex, S & P BSE 100, etc.) that it tracks, minimum amount of SIP and lump sum investment and exit load. Also, to understand the level of risk associated with investment in a fund, the factsheet also provides a 'riskometer'. This indicates the risk level of the scheme which can range from low to high and often helps investors to match it with their risk appetite and take appropriate investment decisions.

Fund Manager
A fund's factsheet also provides information about the fund manager that will include details about qualification, experience and the performance of other funds managed by him, if any. This helps an investor know who is spearheading the funds and how capable the person is in managing it.

Portfolio Composition
A mutual fund is a well-structured product. It is a diversified portfolio of stocks or bonds or even a portfolio of different asset classes. Portfolio composition helps investors understand where the particular mutual fund is investing and in what proportion. They can even know how much cash the fund is holding. Hence, this component of the factsheet acts as one of the most important tools for analysis.

Performance
A factsheet provides trailing historical performance data for different time periods such as performance since inception or for periods of one year, three years, five years, 10 years and 15 years. And against this even the benchmark and additional benchmark's performance is provided for similar periods. This section of the factsheet helps investors to analyse scheme returns as against its benchmark, SIP returns and overall market returns.

Key Ratios
Finally, a factsheet also provides key statistical risk return ratios such as standard deviation, beta, Sharpe ratio, R-squared, total expense ratio (TER) and portfolio turnover ratio. With these ratios investors can gauge the risk and risk-adjusted performance of the scheme. Also, they can understand whether the scheme indulges in frequent buying and selling of stocks or adopts a buy and hold strategy.

There are several key points of a factsheet that an investor must necessarily focus on. These include:

Performance : It is true that past performance is not a barometer of future performance. However, the past performance of a fund gives you a rough idea about its capabilities to perform in the future. Therefore, you can consider this as your first step. The fund returns or even the benchmark returns provided in the factsheet indicate annualised percentage returns, popularly known as compounded annual growth rate (CAGR). This will also help you to get a fair idea as to how the investment has grown over the period of one year, three years, five years and 10 years.

Say, for instance, if you wish to invest `1 lakh then you can roughly calculate how much you would have had earned if you had invested for one year, three years, five years and 10 years back. However, you should not just base your decisions on this aspect alone. It should just be your first step to understand the fund. There are various other parameters such as rolling returns, risk, risk-adjusted returns, etc. to consider before taking the final investment decision.

Portfolio Holdings : To further analyse the fund you need to check whether the portfolio is adequately diversified or not. Even the asset allocation and sector allocation adopted by the fund is represented in the graphical format. Sector allocations and portfolio holdings help you get a break-up of how the fund house allocates your money. It is crucial to know how your money will be deployed after you invest it in a fund. Further, reviewing this section is crucial as it is the portfolio that is going to decide how the fund is going to perform in the near future.

Expense Ratio : As expense ratios can meaningfully affect the returns of the funds, it is made mandatory to be stated in the factsheet. Expense ratio is nothing but the cost that is charged to the investor for managing a mutual fund scheme. In the factsheet, the total expense ratio (TER) for direct as well regular plans of all the schemes provided by the fund house is detailed. The only difference between the direct and regular plan's TER is the commission paid to the mutual fund distributors. But though the expense ratio is important, investors should not base their decisions solely on it. A fund having a solid track record with a higher expense ratio might be better than one that charges less but performs poorly.

Fund Manager : A fund manager is the captain of the fund and he decides the allocation of your investments. A factsheet provides details of the fund manager such as qualifications and experience along with information on various other funds he manages for a particular fund house. Fund managers tend to be experts in the field of investments with extensive industry experience. Hence, it is important to know who manages your money. To understand the performance of your fund managers check out their track record. This will help you to understand how fund managers perform in market cycles. A stable and experienced fund manager with a good track record helps investors have a sense of confidence. Any change in the fund manager should be looked at with some caution. His sudden exit or frequent changes in the fund management team can materially impact the performance of the fund.