April 8

Understanding Mutual Fund Factsheets- Part 1


Most investors do not really look at factsheets. Or if they do, it is only cursorily. But mutual fund factsheets have a plethora of information that can help you make an informed choice about investment in a particular fund. For existing investors it serves as a guide to the way their funds are being handled Let us have a look at a typical fund factsheet and try to understand how it can help you decide.

The factsheet essentially can be looked at in three sections: Scheme Features, Performance Details and Portfolio details.

Scheme Features

The most important of this section is the ‘Investment Objective’. The nomenclature may differ from one fund to another but this tells you about the aim of the scheme. You can check whether the investment objective is in line with what you are looking for. For example if you are looking for investing in large-cap companies, you will need to pick a fund which has investment objective of consistent growth by focusing on well-established, large cap companies, rather than a fund whose objective is generating capital appreciation through equity investment in companies whose share price is quoting below their true value.

There are other details like fund size, date of inception which will help you judge the standing of the fund in the mutual fund universe. Older funds will have a long track-record to show. You will be able to see performance in various market conditions. For newer funds which have not seen various market cycles, it will be a little difficult to judge how they will perform in certain market conditions, whether they stick to their mandate of investments or change track. You can especially try to see how the fund has performed in down market conditions. Though, here it is necessary to understand that past performance is no indicatUnderstanding Mutual Fund Factsheets- Part 1or of future performance.  As regards the fund-size, it is usually said that smaller funds are nimble and are able to make quick moves in times when market conditions change, to give better results. But it may not necessarily be true. The importance of fund size is also a factor of the type of market they operate in. A big mid-cap or small-cap fund might find itself in sticky situations if they want to get out of scrips in a bad market. This would be because they would be holding scrips of smaller companies which are probably less traded as compared to large cap companies. So the same situation may not be difficult for a big large cap fund.

The scheme features will also have names of the Fund Manager who are handling these funds. You can do some research on their investment philosophy and how other funds managed by them are doing.

There are other details like loads, expense ratio, modes of investment available, minimum application amount, redemption proceeds etc. These will be necessary to know when transacting in the fund. You need to pay attention to the exit load, as that is the time that in view of the fund house, you will need to be invested in the fund to see any meaningful gains. Higher expense ratio means lower returns for you. These are inbuilt in the NAV, so you don’t really come to know about the expenses directly, unless you read the factsheet. Usually actively managed funds have higher expense ratios as compared to index funds which are passively managed funds.


Nowadays the depiction of returns has been standardized across fund houses. So you can have a like to like comparison if you look at fact sheets from different fund houses. You will see discrete and cumulative return figures shown.  You can see change in the NAV, returns in percentage and the current value(as on date of factsheet) of Rs.1000/- invested in the fund. All these figures are compared to the benchmark of the fund and an additional benchmark. Here you can get an idea that the NAV as a number is not important, but the percentage returns are.


This section shows the holdings of the fund. This will be a guide to whether the funds is investing as mandated. If a mid-cap fund is holding large cap scrips, it is wavering from its investment objective. So you need to watch-out.  It will also show you sectoral break up of the holdings. A diversified equity fund should not have concentrated holdings in particular sectors.  You may also want to have a look at the cash holdings in the portfolio. A large cash holding means that the fund is not finding attractive picks in the market at the moment. This might be a losing proposition if the market was to move up suddenly. You will not be able to get the gains in the market. The whole idea behind investing is to be invested in the market as per the mandate of the fund. If the fund sits on huge cash for a long time, it is not going to help you in any way.

Portfolio turnover ratio will give you how much the portfolio is being churned. A 50% portfolio turnover ratio means that half of the holdings of the fund have been replaced. The ratio reflects the action on part of fund managers in changing market circumstances. A growth fund will have a higher turnover as compared to a value fund. An unusually low ratio can also reflect inaction on part of the fund manager. It is also pertinent to note that higher turnover ratio will mean higher costs for the fund.

Volatility measures like standard deviation, beta, R squared and Sharpe ratio will give you a fair understanding of whether the returns received are in line with the risk taken. It will also tell you whether the returns are due to the market movement or because of smart stock picks by the fund manager. More on this in part 2 of the article.


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