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Why you must read your mutual fund fact sheet

June 25, 2009 10:22 IST

Ashutosh Wakhare

In all the previous articles we have been focusing on understanding the language of money and becoming independent investors through acquisition of knowledge. In the forthcoming articles we will look at some of the terminologies that you will find in mutual fund fact sheets.

We urge readers to ask for fact sheets from their advisors and mutual funds every month. And here's why you must read your mutual fund fact sheet

1. To understand what mutual fund scheme you have bought

A fact sheet is a booklet, which is published every month by all mutual funds. This booklet contains vital information about each of the schemes of that particular mutual fund. Investors can benefit hugely by analysing these fact sheets. After all, aren't these fact sheets designed with the sole benefit of the investors in mind?

Problem is that many times investors do not know how to read a fact sheet. What story do the various numbers, tables and colourful graphs tell? Which scheme should an investor enter and which one should be given a miss are the decisions that a fact sheet will help the investor in making.

Before we begin reading a fact sheet, investors must remember an important point: stocks are like children; have only as many as you can manage. The same can be extended to mutual fund schemes as well. Do not invest Rs 5,000 in 20 different schemes for the sake of diversification. You achieve nothing and end up investing so little in each scheme that you don't feel like monitoring that small amount. So in the end, the cumulative effect is that you do not monitor any of your investments.

Also understand 'Diversification'; there is a myth that the more diversified portfolio an investor has, the lesser risk s/he carries. So instead of having 10 schemes, you feel 20 are better and instead of 20 you feel 30 are better

If this were to be true, why don't you own the entire market? You will be risk-free in that case! Right? How good that will be?

All of us know this can't be true. Hence proved diversification is useless, beyond a point. Legendary investors say diversification is for people who do not understand what they are doing, and if you fall in that category, isn't it obvious that you first need to understand how to analyse stocks or read fact sheets!

Secondly, mutual fund schemes portfolios are well diversified themselves, barring some typical schemes. What sense does it make to further diversify amongst mutual fund schemes then? Maybe having schemes from different fund houses is somewhat advisable, but if you think that mutual fund schemes are indeed like children and you should have only as many as you can manage you don't need too many schemes in the first place.

So the first point we remember before we embark on our journey towards becoming smarter and more independent investors is that there are many products in the market and there are even more people who are willing to sell them. However, smart investors that you are, you must buy only those products you want and what do you want you will decide only after understanding how mutual funds work!

Disclaimer: This article is for information purposes only and should not be considered as an investment advice.

Illustrations: Rediff Archives

2. To know more about your scheme's performance

Let us start from the first page of a fact sheet.

Invariably, the first few pages contain commentary by senior fund managers and chief investment officer of the fund house. Here we get to know a brief of what the past month was like and the next month is expected to be.

Again, if you do not understand the language of money, you will not be able to understand anything written here.

Typically, you will find outlook for the equity and debt market given separately.

Different mutual funds give different sets of information and there is no regulation per se on this. A leading private sector mutual fund comes out with a very elaborate fact sheet every month. It is in investor's interest to read this fact sheet to understand what all can be disclosed by a fund house. Not all fund houses provide such information.

Also keep in mind, good fact sheet presentation does not mean you invest in any/ all schemes of a fund house.

Typically you will find details of equity funds at the beginning of the fact sheet and then these are followed by details about debt funds. A leading public sector mutual fund's fact sheet gives a snapshot of all its schemes under the equity category at the beginning of the detailed presentation of its equity schemes. The same is followed for debt schemes as well. This makes it easy for the investor to search exactly what s/he is looking for.

But again understand: a good and orderly presentation is no certificate of good performance.

3. To know the outlook of your fund manager

In all our earlier articles we have been using a term 'average maturity' fairly regularly. In a previous article we showed how the fund manager managed the scheme's average maturity to deliver stellar returns.

If we have understood that in a rising interest rate scenario we would like to own fixed deposits/ bonds with lesser maturity and vice versa, then obviously we need to know the maturity profile of the bond fund.

This can be known from the fund fact sheet. All the charts that we are showing in these articles are drawn from data taken from fund fact sheets.

Among the other details that fact sheets give, you will find a term 'average maturity' mentioned there. This is nothing but the same 'average maturity' that we have been speaking about for so long.

In case of actively managed bond funds you will find this increases/ decreases frequently. In case of fixed maturity plans, FMPs, (now they are not in vogue) typically there would be no change in the portfolio for the entire term of the scheme, hence the average maturity would remain constant.

Also, not all fund managers are able to get their call right on interest rates. Even if they do, execution is extremely difficult. So while selecting a bond fund, it is best to see how the fund's average maturity profile has been moving for the last 12 to 18 months, what is your outlook on interest rates, what is the current average maturity of the scheme and what is the fund manager's view on interest rates (this you can get by reading the fund manager's commentary on the first page of a MF fact sheet).

4. To know the credit rating of your mutual fund scheme

It may be quite possible that your views are opposite to those of his/ hers. That's perfectly fine. Fund managers are also human beings after all and hence they can get it wrong, and we may have had some experiences over last so many years, where we have a feeling that the opposite may happen.

Scan various fact sheets and you will observe that two fund managers will never have exactly the same opinion. There always will be people with different views -- that's why markets exist.

If you are able to get a hang of how to anticipate interest rate movements fixed income investing base is formed. That is the most important part and can be attributed 80 per cent of importance (this is our personal view and not a generally accepted one). The remaining 20 per cent can be to other factors like credit rating, expense ratio, relative returns to benchmark, etc.

Credit rating is an extremely important parameter, but if you focus on gilt funds only, then this parameter totally loses its significance. It is said that 200 years ago when the queen of England issued debt paper, they were lined with gold. Hence the name 'gilt edged paper'. Now-a-days neither do we have debt instruments in paper form, nor do we have any gold on them but the names still have persisted.

It is but obvious that government paper of any country is the safest place to invest in that country. Nothing can be safer than the government. Hence government paper is said to have Sovereign rating. It is assumed that governments will never default. Private corporations, however well off, do not have the powers that the Government of India, GoI, has.

Neither can they change tax rules nor can they print money. If the GoI needs money, it can change tax rules so that money can be taken out of private corporations into its coffers or if required the GoI can print more notes to meets its obligations. Hence even the best private company can default. Having said this, it is also important to understand that such things cannot be done without other ramifications and more importantly such steps are extremely drastic ones and would be undertaken only under extremely challenging situations, when everything else fails.

Thus from an investor's point of view, investing in Gilt funds is the easiest option among debt mutual funds as s/ he has to worry only about the average maturity and not credit rating.

In the next article we will focus on investing in debt funds other than gilt funds. Here credit rating will be an important point to look out for!

The author is a debt market trainer associated with NISM (SEBI's investor education initiative), Bombay Stock Exchange and leading mutual funds. He can be contacted on