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A close look at factsheets is a must for current and future MF investors, says Nikhil Walavalkar
IT IS important to be well informed before you invest in a mutual fund on the premise that the fund will deliver. And when it comes to a fund in which you have already invested, it is even more crucial to be well up on numbers and facts. Fund factsheets serve the same purpose. Debt and equity schemes of most of the fund houses declare their portfolios every month. Read on to get a grip on what you should be looking out for in the fund factsheet of mutual fund schemes. Let us start with the equity fund factsheet.
• Portfolio
The stock portfolio is the most important component of an equity fund factsheet. Look for the diversification strategy of the fund manager. A high exposure to a particular stock or a particular sector could spell danger. An exposure to a fund’s top five or top 10 stocks is something one needs to take a closer look at. Typically, good funds restrict their single stock exposure to 5% of the net assets of the fund, though there is no such hard rule. In well-managed funds such as Sundaram BNP Paribas Select Focus, the fund maintains a concentrated portfolio of approximately 30 stocks with the top 10 stocks accounting for 45% of the entire portfolio. On the other hand, there are funds such as the Fidelity Equity Fund where the portfolio is much larger comprising over 70 stocks, with the top 10 stocks making up for 36% of the net assets.
Sectoral allocation is also important. Excessive exposure to one sector can mar the returns if the sector underperforms. A point to note: While looking at the sectoral allocation, please consider related sectors as one sector. Some funds report auto and auto ancillaries separately. Though auto ancillaries thrive on replacement demand, they enjoy strong correlation with the auto sector.
A good fund caps the exposure to an individual sector at 15% of net assets. Sector funds form an exception to this rule. It is also important to compare the stock exposure norms and sectoral allocation over a sustained period of time. This gives you an idea as to how the funds have been deployed and the risk associated with such portfolio diversification.
Higher cash exposure results in underperformance in a bull market but may not be a bad strategy in a sliding market. High cash holdings also signify lack of investment opportunities for the fund manager.
• Ratio rationale
Two key ratios you must keep in mind are portfolio-turnover ratio and expense ratio. Portfolio-turnover ratio is a measure of churning the fund has undergone while the expense ratio tells us about the cost of managing the funds.
Higher portfolio turnover is seen in opportunities fund and in more actively-managed fund. Value funds are expected to show a low-portfolio turnover. However, these are just the norms and the reality may be different. If the portfolio churn is paying off, one can take the high-trading costs in one’s stride.
The expense ratio is capped at 2.5% for all schemes. Index fund and fund of funds enjoy lower caps. A higher-expense ratio can be a function of lower assets under management. As assets grow, expense ratio is expected to fall. An expense ratio above the average enjoyed by the category can be explained by only a relatively higher performance. However, it becomes imperative to keep a track of this number, because it simply eats into the returns. Especially in a bear phase, the expense ratio separate the winners.
• Fund manager
The team that manages your money makes the difference. As the fund houses are experiencing a high churn of professionals, it becomes important to keep a track of the fund manager. It makes more sense to stick with a fund house that has a research and investment process in place than just tracking a star fund manager. Funds managed by individuals or by a specific team for long term are better because the fund management style is better known and amounts to stability in fund management. HDFC Top 200 and HDFC Equity Fund have been managed by Prashant Jain for quite a few years. Templeton India Growth fund is managed by Mark Mobius who enjoys the patronage of investors who are comfortable with his fund management style and are not easily swayed by any short-term volatility in the market.
• Other information
The fact sheets also talks about the loads, performance and assets under management (AUM). An erratic change in AUM can lead to instability in the fund performance. These are some of the important points you can ponder over in an equity fund factsheet. In case of debt funds, you should consider the following factors.
• Credit rating
In debt funds, the biggest risk is of default. Higher credit ratings reflect higher security and a lower chance of default though the coupon will be lower compared to a security of similar maturity with a lower credit rating. Some fund houses park money in low-rated instruments to boost returns. However, it adds to the risk profile, especially in recessionary times.
• Average Maturity
Debt instruments are exposed to interest-rate risk. Higher the maturity, higher the sensitivity to changes in interest rates. Such investments can backfire when bond price drop rapidly in a rising interest rates regime compared to those with lower maturity. One should look at factsheets of at least few months to understand the view of the fund manager on interest rates and his method of tackling changes in interest rates.
• Asset allocation
The debt-fund category is further divided into gilt, income, monthly income plans (MIP) and floating rate funds. One must check if the portfolio is in line with the mandate of the fund. Especially, there are some floating rate funds that are parked heavily in short-term instruments and call money markets due to lack of availability of floating-rate instruments. While investing in a MIP, do take the trouble to sift through past months fact sheets. This gives a fair idea of the risk profile the fund carries.
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