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Your Money: Mutual fund factsheet Seven key details you need to check


To make it convenient for investors, these individual pieces are elaborately described in what is known as a ‘Fund Factsheet’ available on every company’s website.

For most investors, picking the right mutual fund is akin to solving a jigsaw puzzle. So without looking at the ‘individual pieces of the puzzle, investors try to hunt for the big picture – ‘Returns’. But it is these individual pieces that play a key role in determining how the big picture will look like.

To make it convenient for investors, these individual pieces are elaborately described in what is known as a ‘Fund Factsheet’ available on every company’s website. Such information helps an investor in assessing which mutual fund scheme best aligns with his financial goals and expectations and thus makes an informed investment decision. Here are the seven key things that you should look for in a factsheet:

Investment Objective
This conveys the asset classes and geographies the fund will invest in, the kind of returns it aims to generate, and the time horizon it requires for this. A ‘Riskometer’, indicating the level of risk the scheme would be undertaking, is also provided. Based on this, you can determine whether it aligns with your financial planning.

Standard Deviation
Typically, investors prefer stability instead of volatility in their returns. And hence, you should consider Standard Deviation (SD) as a key performance metric. SD measures the volatility of a fund’s returns in comparison to its average; i.e., how much a fund’s returns can fluctuate from its historical return. For example, if a fund has a 15% average return and SD of 5%, then its return can vary from 10-20%. The more the SD, the higher the volatility of the fund.

It is the volatility of a fund compared to its benchmark index. A Beta of more than 1 means the scheme is more volatile than its benchmark. If it’s lower than 1, then it’s less volatile than the benchmark.

Sharpe Ratio
If you have to choose between two funds offering the same level of returns, then Sharpe Ratio can be one of the deciding factors. It compares a fund’s performance in relation to the risk that it has taken, thereby reflecting its risk-adjusted returns. The Sharpe Ratio is preferred to be higher.

Benchmark Comparison
The factsheet provides the scheme’s historical returns in comparison to its benchmark. While past performance is not a guarantee of future returns, it gives an idea of how often the scheme outperformed or underperformed the benchmark. Returns generated in excess of the benchmark returns are referred to as ‘Alpha’. Anything more than zero is seen as good alpha.

Portfolio Turnover Ratio
A buy-and-hold approach may not work at all times, but it is still desirable that the portfolio of a fund remains largely stable. The portfolio turnover ratio (PTR) reflects this by calculating the percentage of a fund’s holdings that have changed in a given year. It is advisable to pick funds with lower/moderate PTR as it indicates well-researched and well-timed investments.

Sectoral Allocation
A factsheet shows the scheme’s exposure to equity, debt, and the cash balance available. It also mentions the sectoral and company-wise allocation of the fund. This gives you a good idea of whether the portfolio is diversified or concentrated and whether the scheme is sticking to its objective.

Source : Financial Express

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