Decoding the numbers: Mastering the art of reading mutual fund factsheets

If you have ever watched an advertisement related to mutual funds on TV or social media, you might already be familiar with the closing line that goes – ‘Read all scheme related documents carefully.’ But have you ever wondered what the fine print says and why it is so important

These documents give out a lot of information related to the mutual fund scheme. Asset Management Companies (AMCs) issue scheme-related documents for mutual funds that can help investors make investing decisions. Some of these include:

• Mutual Fund Factsheet
• Scheme Information Document (SID)
• Statement of Additional Information of mutual fund
• Key Information Memorandum
• Account Statement

Let’s discuss the factsheet in detail.

• Table of contents

1. What is a mutual fund factsheet?
2. 5 important components of a mutual fund factsheet
3. How to read a mutual fund factsheet?
4. FAQ

What is a mutual fund factsheet?

As the ‘factsheet’ in the name suggests, the mutual fund factsheet contains vital information, facts, figures, disclosures as well as terminologies related to a mutual fund scheme. Every investor must be aware of the information contained in this document before investing in the scheme. The AMCs release a factsheet every month with the latest performance of the funds among other details.

5 important components of a mutual fund factsheet

Basic fund information: This section of the mutual fund factsheet contains information like the scheme’s objective, category (large cap, mid cap, small cap, multi cap, flexi cap, etc.); Net Asset Value (NAV); Plan option (Direct, Growth, Dividend, etc.); Benchmark (NIFTY 50, NIFTY 200 TRI, etc.); minimum investment amount for lumpsum and SIP; risk level on the riskometer (low, moderately low, moderate, moderately high, high); and exit load

Fund manager: The performance of a mutual fund investment depends a lot on the investment decisions taken by the fund manager. Any change in the fund management team can potentially have a big impact on the performance of the scheme.

Scheme portfolio: Each scheme invests in a range of assets to have a diversified portfolio. This section in the factsheet tells the investors about the asset allocation of the mutual fund, the top 10 holdings of the scheme with their percentage in weight, and stock concentration in different companies and industry sectors. Investors can use this information to determine the risk mitigation and diversification of the scheme.

Performance analysis: This section of the mutual fund factsheet contains the historical performance data of the scheme for different time periods. Depending on how long the scheme has been running, it will have the fund’s performance in 1/3/5/10/15 years. Factsheet. Investors can check the scheme returns, SIP returns, overall market returns and returns against benchmark when they see this section.

Key ratios: This section of the mutual fund factsheet contains data that investors can use to analyse the risk-return ratio of the fund. It contains important factors to analyse a mutual fund’s performance such as:

• Standard deviation (SD) – Measures the fund’s returns as compared to its mean or average
• Beta ¬– Indicates how volatile the fund is compared to a benchmark.
• Sharpe ratio – Measures the fund’s performance compared to the risk taken.
• R-Squared – Indicates how the scheme’s performance is related to the benchmark.
• Total expense ratio – Shows the cost of fund management that investors must pay.
• Portfolio turnover ratio – Reveals the frequency with which the assets held under a fund have changed over time.

How to read a mutual fund factsheet?

A mutual fund factsheet helps you find out if a particular mutual fund scheme is suitable for your portfolio or not. Here are a few tips to read the mutual fund factsheet:

Risk level: Check the risk level of the mutual fund indicated on the riskometer. If you are a conservative investor, you must consider investing in schemes that fall in the ‘low’ or ‘moderately low’ categories only.

Fund management: Fund managers can make or break a scheme since they make all the investing decisions on your behalf. Invest in schemes where the fund management team appeals to you.

Performance analysis: If you are investing in a mutual fund scheme that has been active for a few years, check the performance of the scheme against benchmark, and so on.

In conclusion, a mutual fund factsheet helps you find important information related to a mutual fund easily. Use the simple tips listed under the ‘How to Read the Mutual Fund Factsheet?’ section to make sense of the information provided in the factsheet. You can use the data provided in the factsheet and other scheme related documents to make sound investing decisions.

FAQs:

What is a mutual fund factsheet, and why is it important?
A mutual fund factsheet is a document provided by mutual funds that contains essential information about the fund's performance, holdings, expenses, and more. It's crucial for investors as it offers insights to make informed investment decisions

What should I focus on when examining the fund's holdings section?
Pay attention to the fund's holdings, sector allocation, and asset allocation. This helps you understand where your money is invested and whether it aligns with your investment goals and risk tolerance.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.