How to read a mutual fund fact sheet

When it comes to investing in equity, investors are advised to read the annual report of the company in which they are planning to invest. A discerning investor can glean all the required information from the annual report to arrive at an investment decision. Similarly, mutual fund investors must go through the fact sheet of the funds before committing their fund.  

A fact sheet is a document that is prepared and uploaded by the fund houses every month on their respective websites. As per the regulation of Securities & Exchange Board of India (SEBI), it is mandatory on part of the AMCs to do so. It is one of the most important documents for you as a mutual fund investor, as it gives you detailed information, pertaining to a particular fund. It gives you deep insights into a particular mutual fund in question.

What to look in a fact sheet?

By now, you might have understood what a fact sheet means. Let us understand what all to look into a fact sheet if you want to invest in equity dedicated funds.

1. At first, you should read the equity market outlook and the commentary given by the Chief Investment Officer (CIO) of the respective fund houses. It will give you an overall picture as to where the markets are heading and what is the equity strategy of different fund houses.

2. The next thing you need to do is to look at the investment portfolio of the fund. This will tell you what are the companies in which the fund has invested and in what proportion. You will also get to know which fund is inclined towards which sector. Also, if you are invested in a diversified equity fund that can invest across market-caps with no restrictions, keep a look at the extent to which it has exposure to large-cap, mid-cap, and small-cap companies.

3. The fact sheet will also show you the returns generated by the fund. Don’t get obsessed with the monthly and quarterly returns and take decisions on the same blindly. Ideally, if you are investing in equity funds then, your focus must always be in the long-term with a minimum time horizon of 5 years.

4. The fact sheet shows various statistical performance parameters such as Sharpe ratio, standard deviation, beta, etc. of the funds, which will help you to understand the amount of risk, a fund manager is taking to generate the said returns.

5. You will also find the expense ratio of the fund. Generally, the larger the fund’s AUM, the lower should be the expense ratio. The lower the expense ratio, the better it is.

6. Check the tenure of the fund manager managing the fund. The stability of the fund management team is an important thing to look at. The more the stability, the more it justifies the returns generated. For instance, if the fund manager is changed and the new fund manager has just completed one year, then looking at the 3-year and 5-year returns, do not make sense.