Mutual funds are an
appealing investment option for all types of investors. They offer access to the full suite of asset classes,
allowing investors to invest based on their risk appetite. However, like with every investment, investors must
know the ins and outs of a mutual fund to gain maximum benefits. This is where the mutual fund factsheet comes
in handy.
A mutual fund factsheet can
address many questions investors may have when investing in a mutual
fund
scheme. It provides a thorough
overview of the scheme.
What is a mutual
fund factsheet?
A mutual fund's purpose or
philosophy, options {growth or Income Distribution cum Capital Withdrawal (IDCW)}, net asset value (NAV) of each
plan, plans (direct and regular), the minimum investment requirement, systematic features (SIP, SWP, STP),
assets under management (AUM), etc. statistics are covered in the factsheet.
By reading the factsheet,
investors can take the first step and decide whether to invest in a mutual fund scheme. It gives readers a clear
and concise image of the scheme through a brief description and visual representations in the form of charts.
Monthly mutual fund fact sheets are made public.
Main components of
the mutual fund factsheet
1. Risk
assessment
Depending on an
investor's risk tolerance or financial situation, some mutual fund schemes might not suit the investor's
risk profile. Investors must evaluate their financial situation regarding the risk linked with the
mutual fund scheme to determine the risk attached.
2. Portfolio
allocation
A portfolio that is
changed frequently over a year will result in more significant transaction costs for the fund. Portfolio
turnover rates are often greater for aggressively managed mutual fund schemes than conservative
ones
3. Performance
analysis
The specifics of a
mutual fund scheme's past performance are also essential. This section compares scheme returns, SIP
returns, returns vs the benchmark, and the market's total return over one, three, five, or 10 years, or
since inception.
4. Fees
To manage investors'
investments on their behalf and conduct the scheme's general operations, mutual funds charge an
expense
ratio. A potential
investor can find out the specific costs associated with purchasing a mutual fund and how much should be
paid to the fund manager.
5. Basic scheme
information
The basic scheme information
section of a mutual fund factsheet provides information about the scheme's AUM (assets under management),
minimum investment quantities (for a lump sum and SIP) and exit loads. The goal, category of the scheme (large,
small, mid, multi-cap, etc.), Net Asset Value (NAV), and plans and options(Direct, Growth, IDCW, etc.) of the
scheme are also included here.
Key ratios involved in
the mutual fund factsheet
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Key
ratios
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Significance
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Standard
deviation
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Standard
deviation is a measure of the dispersion of a set of data from its mean. The more spread apart
the data, the higher the deviation. It is applied to the annual rate of return of an investment
to measure the investment's volatility.
To simplify,
standard deviation indicates how much the returns of a mutual fund scheme may deviate from its
average historical returns.
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Sharpe
ratio
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The Sharpe
Ratio is a measure for calculating risk-adjusted return. It is the average return earned in
excess of the risk-free rate per unit of volatility or total risk. The ratio is useful in
determining to what degree excess historical returns were accompanied by excess volatility. The
bigger a portfolio's Sharpe ratio, the better its risk-adjusted performance. If the benchmark
rate is greater than the portfolio’s historical return it’s called a negative sharpe ratio.
Otherwise, the portfolio return would probably be in negative.
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R-squared
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R-squared is
a statistical measure of how closely the portfolio returns are correlated with its benchmark. It
interprets the percentage of the scheme’s/security’s price movements that can be explained by
the movement in the benchmark index.
R-squaredis
usually reported as a number between 0 and 100. If a mutual fund scheme is with an R-squared of
0, it has no correlation to its benchmark at all. Whereas, if a mutual fund schemehas an
R-squared of 100, then the scheme’s performance would exactly match the performance of its
benchmark.
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Tracking
error
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The standard
The annualised standard deviation of the difference in between the Index Fund and the Target
Index. For example, in the previous year ‘XYZ Index’ returned 10% while the ‘ABC scheme’
tracking the index returned 9.7%. Here the tracking error would be 9.7% - 10% = -0.3%.
Lower
tracking error schemes offer returns that are generally in line with the benchmark
indices.
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Expense
ratio
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Total Expense
Ratio is the percentage of a scheme’s average Net Asset Value. It usually indicates how much the
scheme charges to manage your investment portfolio. Choosing a scheme shouldn't be based only on
its expense ratio. Even though a scheme has a higher expense ratio, investors shouldn't shun it.
Higher expense ratio schemes are considered to offer better returns than lower ratio
schemes.
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Importance of mutual fund
factsheet
• Before investing,
prospective investors should thoroughly examine a mutual fund scheme. They can better grasp risk, return,
the scheme's objective, portfolio allocation, etc., with a mutual fund factsheet.
Investors can then choose
only those schemes that fit their investment objectives and avoid others by carefully reading a
factsheet.
Mutual Fund investments are
subject to market risks, read all scheme related documents carefully.
