How to read an Equity Fund’s Monthly Fact Sheet…

Every mutual fund is required to file a monthly fact sheet and also host it on their websites. This PDF is generally available on the mutual fund website and is available for free download. As a mutual fund investor you need to understand that this Fund Factsheet contains a wealth of information about performance, risk and expense parameters. As a mutual fund investor, there is a wealth of information that you can glean from these fact sheets. Here is a quick primer on how to read an Equity Fund Monthly Fact Sheet…

Take a look at the portfolio mix…

The Fact Sheet of an equity fund provides the stock portfolio and the sector mix of the fund. There are different approaches you need to take. In case of a diversified equity fund the sectoral mix must be approximately equal to the Index mix. Thus in the Indian context the largest sector weightage must be for banking followed by IT. In case of a mid-cap fund, you need to ensure that the exposure to a theme or a particular macro variable is not too high. For example you do not want your fund to be over-exposed to rate sensitive sectors (banking, real estate and auto), as they are susceptible to rate hikes.

Evaluate the returns performance…

Remember, you enter an equity mutual fund for the long term. The Fact sheet indictes returns over different periods of time like 1 year, 2 years, 3 years, 5 years and since inception. Focus more on the long end (3 years and beyond). One year performance can be a flash in the pan but a 3-year consistent performance is hardly a flash in the pan. More importantly, ensure that over the long term your equity fund is beating the benchmark index by a margin of at least 5%, because otherwise you will be better off in a low-cost index fund than taking the additional risk of equity funds.

Most of the fund fact sheets also disclose how much will your returns be in case you had done an SIP on the fund? Here again focus on the period of 3 years and beyond. Typically, over a longer period of time the SIP should be able to outperform the normal lump-sum investment in the fund due to rupee cost averaging.

Evaluate the risk of the equity fund…

High return, by itself, is meaningless if it comes with higher risk. If your fund manager is performing better than peers by taking on more risk, then you need to be careful. The fund manager is exposing your money to additional downside risk by adding more risk to your portfolio and therefore your higher returns are coming at a cost. For a diversified equity fund you want a beta that is marginally different from unity. A beta of more than 1.25 can be quite dangerous in a falling market. Fund factsheets also disclose the Sharpe Ratio which gives you an idea of how much return the fund is earning for every unit of risk? This will clearly help you establish if your fund manager is earning higher returns by taking on higher risk or through his fund management skill.

Check out the expense ratio…

This is a very important variable for you to consider. The expense ratio for each fund is disclosed as part of the fund fact sheet. Typically equity funds in India have an expense ratio of around 2-2.25%. You need to be cautious of any fund that has an expense ratio more than that. As per the new norms, the fund is also required to disclose the expense ratio of a direct plan separately. In case of a direct plan, the investor does not go through a broker but directly invests money through the AMC itself saving himself the upfront commissions. Normally the difference between the expense ratio of a normal plan and a direct plan is around 60 bps.  As a mutual fund investor you need to take a business call on whether you are willing to pay this higher cost for the service provided by your advisor. If your financial advisor provides a host of additional services and research support, then it surely makes sense for you to go through your broker. This also means that a Direct Plan will have an NAV that is higher than a normal fund option.

The moral of the story is that the fund factsheet is a wealth of information. As a mutual fund investor you need to take time off and go through these basic details pertaining to your fund. In the process it will enable you take a more informed decision. After all, it is your hard earned money!

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