A mutual fund fact sheet represents all the vital information investors need to know before investing in mutual funds. As an investor, you must know who is managing your money, how it is being managed, where the money is being invested and so on. Since collecting all the information is a task, the mutual fund fact sheet comes to the rescue.
Publishing monthly mutual fund factsheets is mandatory for all fund houses, and you can find it under the download section on most fund websites.
How to interpret a Mutual Fund Fact Sheet?
• Start from the basic information
To get a better idea about the fund, start reading along the investment objective, fund category, i.e. whether equity, debt, hybrid, etc., the expense ratio, etc. Don’t forget to read about the fund’s Assets Under Management, the minimum amount (for both SIP and lump sum) needed and the benchmark such as Nifty 50.
Through the Risk-o-metre, you can get an idea of the risk involved in your investments. It may vary from high to low and can help you make wise decisions according to your risk appetite.
• Read about the Fund Manager
This section talks about the crucial details related to the fund manager. You might want to go through it carefully. Checking the fund manager’s experience, knowledge, and skills is crucial. The fund manager and the team might also change. So, if there is any change, you can try to figure out the reasons behind it.
Thus, it is important to look closely at the new fund manager’s performance to determine if the old fund manager was the main reason behind the fund’s stellar performance. You might see a temporary change in the fund’s performance in the short run, which is normal.
• Go through past performance
Though past performance does not guarantee how the fund will perform in the future, it shouldn’t be overlooked. It also shows how the fund performed during the different market cycles. Look for returns of the schemes, SIP returns, the market’s overall returns and the returns against a set benchmark.
• Look for the information about the portfolio
As an investor, you must know where your money will be invested and how much. This section talks about the same.
You will see the underlying instruments, such as equity and debt instruments, that form the portfolio of your fund. You will also see how much of the fund is allocated towards the specific instrument. In the case of equity funds, you’ll also notice sectoral allocation, such as banking, IT etc., in the form of percentages.
In the case of hybrid funds, you will also see the asset allocation breakup in percentage between equity, debt and other asset classes.
• Study the ratios
The fact sheet also talks about the key ratios you should study. However, make sure you don’t rely on any ratio solely.
Portfolio Turnover Ratio: It means the fund’s shareholdings that have changed during a year. More churn means more costs involved. Typically, a lower portfolio turnover ratio indicates a strong conviction of the fund manager regarding their investment choices.
Beta: It is a measure to check the fund’s volatility compared to the benchmark. If the beta of a fund is more than one, it indicates that the fund is more volatile than the benchmark.
Hence, if you’re a conservative investor, you can look at funds that have a lower, ideally less than one.
R squared: The ratio tells about the relation between the fund and its benchmark. Hence, the higher, the better.
Sharpe Ratio: The ratio refers to how the fund has been performing with respect to the risk taken by it. Hence, the higher the Sharpe ratio, the better.
Tracking error: If you’re deciding which index fund to invest in, you must not ignore this ratio at any cost. It talks about the difference/error between the fund’s performance and the benchmark’s performance. Hence, the lower, the better.
Final words
A mutual fund fact sheet is an excellent one to study if you’re looking to invest in mutual funds but don’t want to rely on a friend’s opinion.
You must make sure to avoid making an investment decision based on any single piece of information.
