6 mins read . 07 Feb 2023
If you are invested in a mutual fund, the fund factsheet published by the AMC each month is a veritable source of information and insights for any investor. Every investor must necessarily check out the mutual fund fact sheet and look for insights. The million dollar question is what should investors look for in a mutual fund factsheet. It can be quite intimidating with the mountains of data on each specific fund. Remember, the Fund Fact Sheet is a goldmine of information to help you understand the fund and the scheme better.
Your starting point is the equity market outlook and the CIO commentary. It tells you about the thinking of the fund and the people who drive decisions. Next, look at the portfolio of stocks owned by the fund and focus on the sector mix theme mix. Be wary of too much exposure to factors like interest rates and inflation. The factsheet also presents returns analysis in detail, so look at the fund returns in different ways. Don’t obsess with monthly and quarterly returns. Ideally, focus on 3-5 year returns and tabulate on a rolling quarterly basis to understand the level of consistency.
Check for the Sharpe and Treynor ratio as they tell you if the fund manager is taking too much risk? Return of 16% with 10% volatility is good but 18% returns with 40% volatility is insane. Sharpe Ratio of the fund tells you about such risk adjusted returns. Look at the total expense ratio (TER), since larger funds have lower TER. This gets debited to the portfolio and reduces the NAV. Finally, check if the fund management team is stable. It ensures continuity and consistency in fund strategy. Such fund teams normally happen to be in sync.
This is a rather homogeneous mix. If you are in a balanced fund, look at the consistency of the debt/equity mix. Too much of shifts is not too good. For Balanced Advantage Funds (BAF), see how discretion has been used in the past by benchmarking returns to the index. That is a good litmus test. Lastly, in the case of arbitrage funds, benchmark arbitrage returns with the rate of interest you can earn on a bank FD. Be cautious if the turnover ratio is too high as it means higher costs and therefore lower returns on the arbitrage fund. Look for short term and long term returns in this case, being a treasury product.
Like in equity funds, here also the outlook of the CIO and past returns matter. However, there are some unique points to look at here. In the factsheet of debt funds, focus on the bond mix in the portfolio and ensure that it is not too skewed in favour of AA rated instruments that are intrinsically more risky. Check out the average maturity of the debt fund, which is nothing but the weighted average maturity period of all the bond holdings.
Remember that the funds with higher average maturity are more vulnerable to spikes in interest rates. Finally, also look out for the duration of the overall bond portfolio. What do we understand by duration? It is the payback period of the fund, including interest pay-outs, and also measures the extent of sensitivity of the fund to interest changes. For instance, in a rising interest scenario, prefer short duration funds, but opt for long duration funds when rates are expected to fall.
Investors often wonder, what do we need to look at in an index fund. After all, it is just reflecting the index. But still you must look at the factsheet. The most important thing that the fact sheet for an index fund will disclose is the tracking error. Lower the tracking error; the better it is as it indicates that the fund is not digressing from the underlying index. For an index fund, positive or negative divergence is not good. One more thing to check out for an index fund is the R2 of the index fund. Now, R2 is the square of the correlation of the returns on index fund to the returns on index. Index funds must have R2 close to 1.
The key point is that the fund factsheet is a treasure trove of information and smart investors must read this factsheet to glean valuable insights.