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Questions to ask on an equity mutual fund factsheet..
05 Jan 2023

One of the basic characteristics of smart investors is that they do their homework thoroughly, irrespective of whether they are investing in equities, bonds or mutual funds. Many investors tend to believe that since mutual funds are managed by professionals, it is best to leave the decision making to the wisdom of the fund managers. That is not exactly the right approach! At the end of the day, the fund manager is managing money on behalf of thousands of investors and each of them will have a unique matrix of risk appetite, return requirement, liquidity needs and tax status. It is, therefore, essential that you do your own detailed homework about the mutual funds that you are holding.

Discover the power of the fund fact sheet..

SEBI regulations require every mutual fund registered in India to provide a detailed disclosure of their fund holdings in the form of a detailed fact sheet. This covers both equity and debt funds and is available for a free download on the website of the fund. You just need to take the effort to download the fact sheet from the fund website and go through the finer aspects especially with respect to your holdings. Let us focus on equity mutual funds first. If you go through the fact sheet pertaining to your specific equity fund holding, there is a wealth of information that is available for your consumption. Here are 5 key questions you need to ask about your equity fund..

1.  How stable and consistent has been the top management of the fund..

Here we are referring to the tenure of the fund managers. You will be ideally comfortable if the same fund manager has been at the helm of the fund for at least 4-5 years. This gives you enough time for the fund manager to build a track record and be evaluated. Additionally, every fund manager has a unique philosophy and style and the stamp is left on the fund. You do not want a situation where the style of the fund keeps changing frequently. That is going to show up in performance, sooner rather than later.

2.  Return performance of the equity fund..

The proof of the pudding lies in the eating. You need to be invested in an equity fund that has been consistently outperforming the index (Nifty or Sensex). Don’t fall for 1 year returns and 3 years returns. They can be quite misleading. You must look at the fund performance vis-a-vis the index over a 5 to 10 year period. That will give you a really long term perspective. Over a 10-year period, there will be occasions when the fund under performs the index; that is perfectly OK. You need to be worried if your fund is consistently under performing the index for sustained periods or if your equity fund is substantially under performing its peers in the industry.

3.  What is the risk the fund has taken to reach these returns?

Thanks to stringent SEBI guidlines, mutual funds are required to disclose a wealth of information about the fund to investors. Risk adjusted returns are an important measure to evaluate an equity fund. Pure returns, as captured in the previous point, may actually be misleading. For example your fund has earned 17% return last year (at par with peers) and is better than the peer group then you may be satisfied. But, this out performance could have come at the cost of assuming higher risk. That is what measures like the Sharpe Ratio captures. In case of Sharpe ratio, the excess returns over the risk-free rate are divided by the standard deviation. Remember, the standard deviation is a measure of volatility and higher SD means higher risk. By dividing the returns by risk you get a clearer picture of risk-adjusted returns. Always pay attention to the Sharpe Ratio of the equity fund.

4.  What is the expense ratio of the equity fund?

Managing a fund has a cost attached to it. There are administrative costs, there is infrastructure cost, there are compliance costs, there is transaction cost and above all there is the marketing cost. All these add up to become the expense ratio of the fund and are debited to the fund and the NAV of the fund is reduced accordingly. However, SEBI requires funds to separately disclose the expense ratio and in case of Indian equity funds it normally varies between 1.5% and 2.2%. Since a large part of these expenses are fixed in nature, an equity fund with a larger corpus will have a lower expense ratio. That is something you need to keep in mind.

5.  What are the cues from the portfolio of the fund?

The fund fact sheet of an equity fund not only discloses details of the stocks in the portfolio and their proportions but also the sectoral mix of the portfolio. This is an invaluable source of information. It gives you insights into whether the portfolio is too much weighted in favour a few stocks markets and few business groups. It also gives you an idea of the extent of mid and small caps in the portfolio. The sectoral mix tells you if the particular portfolio is vulnerable to systematic and thematic shocks. Also looks at shifts in the portfolio and whether they are in sync with the overall vision of the fund and the outlook of the fund manager.
The Equity Fund fact sheet is a valuable source of information and insights into your fund. A few basic questions can go a long way in helping you extract more value from your fund holdings.

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