Check these 6 points in a Mutual Fund Factsheet before you invest

Mutual funds are amongst the best investment avenues for young investors. The only slight problem is that hundreds of schemes are available in the market, and you may find it confusing to choose the best one. It is here that a mutual fund factsheet can act as a saviour. A factsheet contains vital information about the scheme and about its performance and risk parameters. This article explains some essential points that you must check in a fund factsheet to make the right decision on which scheme to invest in.

#1: Investment Objective

The fund manager has to stick to this objective while managing the scheme. For example, the investment objective of HDFC Top 100 fund says,” To provide long-term capital appreciation/income by investing predominantly in Large-Cap companies”. The investment objective will help you to find out whether the scheme is aligned with your requirements or not. In this case, if all you need is a simple scheme that invests across market capitalisations, then this scheme is not the right one for you.

#2: Fund Manager experience and Scheme Inception Date:

You don’t want to give your money to an inexperienced fund manager or a relatively new scheme without any track record of performance, do you? Check this information to invest your money with fund managers having decent experience in managing the scheme. Also, the scheme should be at least a few years old. This will help you track its record of performance.

#3: Portfolio composition:

In this section, you can find the top holdings of the scheme as of date, along with their percentage. There are separate charts for industry allocation (equity funds) and portfolio classification by asset class and rating (debt funds). Portfolio composition is helpful in the following ways:

  • To find out the degree of diversification of the portfolio – generally, a well-diversified scheme reduces the chance that one stock’s dismal performance can impact the returns of the entire scheme as a whole.
  • In the case of debt funds, the portfolio classification chart helps determine the credit risk in the scheme. For example, a scheme with a more significant proportion of investment in sovereign government and AAA rated securities results in relatively low credit risk.

#4: Scheme Performance

In this section, you find tables for scheme performance vis a vis—the benchmark. You also have a separate table for SIP performance vs benchmark. Check whether the fund is outperforming the benchmark, especially for periods of 3 years and more. If the scheme fails to outperform its benchmark consistently, there is little sense in investing in that scheme.

#5: Risk Parameters

Along with the performance, it is also essential to check how the fund manager manages the risk in the scheme. You can find it out through the following ratios:

  1. Beta: This ratio indicates the relationship between portfolio returns to the market as a whole. The more the beta, the more sensitive scheme returns are to the movement of the benchmark index.
  2. Sharpe Ratio: This ratio indicates the returns generated by the scheme over the risk-free returns per unit of risk taken by the scheme. A positive and higher ratio is what you should look for.
  3. Standard Deviation: This ratio measures the volatility of the scheme and how the scheme returns vary from the average returns. Go for a lower standard deviation if you look for a consistent and stable return from your investment.

#6: Other Ratios:

Apart from the above risk related ratios, some other ratios are helpful in scheme selection as follows:

  • Portfolio Turnover Ratio: This is basically the percentage of a fund’s holdings that have changed in a given year. It demonstrates the conviction that the fund manager has in his calls in volatile markets. A low turnover ratio is a positive sign. It indicates that the fund manager has a firm conviction in his picks and does not want to churn the portfolio unnecessarily to chase short-term returns.
  • Total Expense ratio: This is the total expenses charged to the month expressed as a percentage of average monthly net assets. Note that there is a different number for regular and direct plans. Prefer choosing schemes with a lower expense ratio as expenses directly impact the scheme’s overall return.
  • Average Maturity: This is useful in debt funds and gives you a general idea of the scheme’s maturity profile. A high average maturity may mean a higher duration risk and corresponding volatility in the returns. If you want stable returns, you can choose liquid or short-term schemes.
  • Exit Load: This is the penalty that is charged if you get out of the scheme early. This charge is levied on the prevailing NAV at the time when you redeem your money. Checking exit load is essential as it can directly impact the return that you earn from the scheme. Try not to invest in a scheme knowing that your investment can be subjected to an exit load.

Conclusion

A mutual fund factsheet is all you need as a young investor when analysing a scheme minutely. However, the more important thing is to be clear on your own financial goals and requirements. Once you are clear on that, a fund factsheet can act as a filter to help you zero in on the suitable scheme. Apart from investing basis a thorough analysis of the factsheet, you need to regularly track the scheme performance so that your investment remains aligned to your financial goals and requirements.

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