How To Read a Factsheet

The document is a report card of the schemes you have invested in

Most mutual funds release details of portfolios every month in a factsheet, which is considered to be a report card of the schemes. It is meant to inform the investor where his funds have been deployed and also for showcasing the credit quality of the investments.

A factsheet can also be used as reference guide by a potential investor to deploy their savings.

Here’s what you should look for in it.
Is your portfolio concentrated? You need to know whether your fund is concentrated or well-diversified. A concentrated portfolio has the potential to bring in more returns. However, it is quite risky as any volatility in the stockmarket can render your investments more volatile as compared to others.

Although the Securities and Exchange Board of India’s mutual fund guidelines mandate that a fund cannot invest more than 10 per cent in any scrip at the time of investment, it’s generally a good practice if your mutual fund remains below 10 per cent, at all times, in all its scrips.

What’s the score? You invest in various mutual funds to earn money. So you need to check out its performance. If it is an equity fund, check out the long-term performance. If it is a debt fund, check out the short-term and the long-term performances. Look at the scheme’s benchmark returns too. This will show how the fund has performed against them.

Cash levels. In the past few years mutual, funds have increasingly been using cash as a strategic tool to combat volatility. When a fund manager feels that markets are too volatile, or fears redemption pressure, he sells scrips and sits on cash. Check out your mutual fund’s cash level as it can indirectly give you a hint as to what market conditions your fund manager is expecting in the near future.

Expense ratios and loads. A factsheet also carries the expense ratio along with entry or exit loads associated with the respective scheme. Expense ratios impact the returns of the scheme. The impact is more in case of debt funds as here the payback is less than for equity funds. The maximum expense ratio, charged as a portion of weekly average net assets, cannot exceed 2.5 per cent in case of equity funds and 2.25 per cent in the case of debt funds.

Average maturity of schemes. Check your scheme’s average maturity (average of total maturity of papers) if you have invested in a debt fund. The higher the average maturity of a scheme, the more vulnerable it is to the interest rate scenario.

Your scheme’s average maturity should be in line with your investment objective. Due to a volatile interest rate scenario, some bond funds sit on cash and, therefore,
sport an average maturity of zero. You should be careful of such discrepancies.

Credit quality. A company’s chances of timely interest and principal payments are reflected by its credit rating. It is expressed in a mix of letters and numbers (AAA, F1+, B-). The higher the credit rating of a scrip, the better is the quality.

A higher-rated scrip is also liquid. It speaks well of a fund that has invested in a majority of its instruments in higher-rated instruments as it indicates safety and liquidity.