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10 things you normally miss out reading in a fund fact sheet
30 May 2023

Every mutual fund is required to prepare a factsheet on a monthly basis and make it available for download on its website. The fund factsheet not only covers the fund manager’s outlook on equities and debt but also gives you important pointers on the returns and risk of the fund. Normally, when we open a fund factsheet, the typical areas we focus on is returns of the fund over different time frames, comparison with the benchmark and the fund portfolio. Normally, investors rarely go beyond these 3 basic items in a fund factsheet.

In fact, the fund factsheet contains a wealth of information and can give you deep insights into the fund performance and the quality of its asset management. You need to understand how to read a mutual fund fact sheet. Remember, reading mutual fund fact sheet is all about delving into the finer aspects of the fund and there are different parameters for equity and debt funds. A rigorous mutual fund fact sheet analysis can give you a 360o view of the fund and also evaluate if it fits into your financial plan..


10 things you must not miss out in reading a fund fact sheet..
1.  The fact sheet begins with the fund manager outlook for the equity and debt market. Read this thoroughly. It not only gives you a perspective of the financial markets but also helps you evaluate if the investment decisions are in sync with the fund manager’s views on the market.

2.  Check out the portfolio turnover ratio of the fund. This is more relevant in case of equity funds and gives you an idea of how often the portfolio is churned by the fund manager. There is a trade-off between portfolio turnover ratio and an aggressive strategy. If the portfolio turnover ratio is higher than competition then it better generate more returns, net of costs. Otherwise it is not worthwhile.

3.  Check out the expense ratio. Typically, liquid funds have the lowest expense ratio while the expense ratio of debt funds is slightly higher. Equity funds have much higher expense ratio in the range of 2.2-2.5%. The expense ratio is billed to you and therefore it reduces your NAV and hence your returns. Over a longer period of time, always prefer performing funds with relatively lower expense ratios.

4.  Check out the Beta and the Standard Deviation of the fund. This is again more relevant for equity funds. Aggressive funds have a Beta of greater than 1 and that entails higher risk. That means you must be earning higher returns on such funds. Standard deviation measures the volatility of the fund. Normally, greater the volatility, greater is the risk in the fund.

5.  Sharpe Ratio disclosed in the fund fact sheet is a good measure of risk-adjusted returns. How do you compare two funds giving the same level of returns? You must divide these returns by the standard deviation. 18% return with low volatility is great but 18% returns with high volatility is not good enough. That is what Sharpe ratio helps you to discern. A slight variant of Sharpe Ratio is the Information Ratio which calculates the risk adjusted returns as a multiple of the tracking error. It shows how much of the excess return is due to fund manager’s skills and how much returns due to pure luck.

6.  An interesting measure for index funds is R-squared. Remember, an index fund is a passive strategy that tries to replicate the index to the extent possible. The R-squared is nothing but the square of the correlation. An R2 of 1 means a high correlation with index. For index funds the R2 should be as close to 1 as possible.

7.  Another important measure for index funds is the tracking error. As we saw earlier, an index fund should tail the benchmark index as closely as possible. However, there are variations due to practical reasons. The lower the tracking error, the better it is for index funds. In fact, both positive and negative deviations are frowned upon when it comes to index funds.

8.  Average maturity and Modified Duration are two very important measures when it comes to debt funds. Average maturity, as the name suggests, reflects the tenure of the bonds held in the portfolio. Normally, this maturity is very important when you are looking at a possible fall or rise in interest rates. This interest risk is measured by Modified Duration. A modified duration of 1.8 indicates that a 1% fall in interest rates will result in a 1.8% rise in the NAV of the fund. Long MD funds are preferred when rates are falling and short MD funds are preferred when rates are hawkish.

9.  Another important aspect to check in debt funds is the rating profile of the bonds held by the fund. Gilts are AAA rated. But many fund managers look at opportunities to buy lower grade private bonds of AA grade and A-grade to enhance returns. Such higher returns come with a higher default risk and you need to be cautious about the same.

10.  Last, but not the least, check the fund manager and the core team longevity. Normally, the best performing funds have very steady and long standing fund management teams. That ensures continuity in thinking and in fund policy. It matters a lot!

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