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Fact of the matter

Fact of the matter

Amutual fund scheme’s fact sheet is like a monthly report card. It provides information to investors about where and how their funds have been deployed.

Amutual fund scheme’s fact sheet is like a monthly report card. It provides information to investors about where and how their funds have been deployed. It also showcases the performance of the scheme and the quality of investments. Sometimes, the monthly reports are also accompanied by the fund manager’s views and comments.

There is no standardised format for a fact sheet. The Association of Mutual Funds of India has suggested that all fund houses have a uniform format, but as there is no guideline from Sebi, fact sheets across the fund houses tend to be different.

However, the important details of equity and debt funds in the fact sheet are almost the same for fund houses. Here are the vital points that an investor can check in a fact sheet:

Stock allocation: It lists the individual stocks in which the fund has invested its corpus, as also their proportion. Equity funds plough in money in a large number of stocks, but investors must consider the top holdings (eight to 10 stocks) of the fund’s scheme. This will help them determine the extent of diversification by the fund.

Sector allocation: This is important as equity diversified funds invest across sectors to derive the benefit of diversification. The funds that consistently allocate a substantial proportion of their assets to a single sector are more likely to be affected by factors such as a slump in that particular sector. Diversifying across various sectors helps offset the negative effects of a downside in a couple of sectors.

Cash levels:
In the past few years, mutual funds have increasingly been using cash as a strategic tool to combat volatility. Check your fund’s cash level as it can hint at the market conditions your fund manager is expecting in the near future. For instance, if the cash level is high, it probably means that the fund manager is expecting market uncertainty.

Expense ratios and loads:
Check the expense ratio along with the entry or exit loads associated with the scheme. The fund’s net asset value is computed after factoring in these expenses. The higher the expenses charged by the fund, the lower are the returns received by the investors. In case of debt funds, the indicators that one should look for are different from those that are common to equity-oriented funds. The factors important for debt funds include the quality of investments, maturity and rating profile.

Average maturity:
As the performance of a debt fund is inversely related to interest rates, the average maturity of the fund’s debt holdings is of utmost importance. If the average maturity is consistently high (over a period of time), it implies that the manager expects the interest rates to fall in the future, and vice versa.

Rating profile:
Debt funds invest in securities with different credit ratings (e.g. AAA, AA+). Such ratings determine the risk profile of a debt fund. The funds that invest the majority of their corpus in low-rated debt instruments are prone to high credit risk, which can affect their performance considerably. There are other facts in the fact sheet that are common to both equity and debt funds such as the investment objective, performance of the fund, applicable dividends, performance of the fund versus that of the benchmark, and the past performance compared with funds within the peer set.

Previous instalment:
What’s an FoF?; Next issue: Account Statement

Published on: Dec 23, 2008, 3:16 PM IST
Posted by: AtMigration, Dec 23, 2008, 3:16 PM IST