Last Updated on Jun 16, 2022 by Nikitha
This article is authored by Ashwin Patni, Head Products & Alternatives at Axis AMC. Ashwin is an alumnus of IIM Calcutta. He joined Axis AMC in 2010 as a Portfolio Manager – PMS and was later elevated to the post of Head Products.
Selecting the right mutual fund is the first step of investing, and it can get difficult for investors to go about choosing the one that suits them. Investors tend to invest in a scheme just by looking at the past returns it has been delivering. But there is more to it. While returns are an important part of analysing a scheme, there are other things that need to be looked at closely.
With a whole lot of information available for investors to find a suitable fund, chances are, they may not understand which one to invest in. To make it convenient for investors, all the key information regarding a fund is available in its factsheet, where an investor can find the details on which stocks/sectors the fund consists of, who is the fund manager, and what are the past returns and so on. The factsheet is a document that gives an overview of the mutual fund scheme and covers every critical bit of information that an investor must know. It covers important aspects of the fund that can be useful for the analysis of every prospective or existing investor.
A periodic review of the factsheet also helps in keeping track of how the investment is being managed.
There is a lot of information available and therefore it is important to know what to look for in the equity factsheet. Here are the key things an investor should look for:
Table of Contents
Understand the investment objective
The investment objective is mentioned at the very beginning of a factsheet, which clearly outlines the goals of the scheme. In about two-three sentences, it conveys the asset classes and geographies the fund will invest in, and the time horizon it requires for the same.
Look for product labelling
A ‘Riskometer’, indicating the level of risk that the scheme would be undertaking, is provided under product labelling. Based on this information, you can determine whether it aligns with your financial planning and if it matches your risk profile.
Check Standard Deviation to understand the stability of the fund
It is important to see how much stability a fund provides in its returns. Hence, an investor should consider Standard Deviation (SD) as a key risk metric. SD measures the volatility of a fund’s returns in comparison to its average, i.e. how much a fund’s returns can fluctuate from its historical return. For example, if a fund has a 15% average return and SD of 5%, then its return can vary from 10-20%. The higher the standard deviation, the higher the volatility of the asset. The higher the volatility, the higher the risk.
Another key metric to evaluate volatility is Beta. It is the volatility of a fund compared to its benchmark index. Beta is a measure of relative risk; it tells us how risky the mutual fund is compared to its benchmark. A Beta of more than 1 means the scheme is more volatile than its benchmark. Conversely, if it’s lower than 1, then it’s less volatile than the benchmark.
Check Sharpe Ratio
If you have to choose between two funds offering the same level of returns, then Sharpe Ratio can be one of the deciding factors. It compares a fund’s performance in relation to the risk that it has taken, thereby reflecting its risk-adjusted returns. In other words, it measures the unit of return earned for every unit of risk undertaken. Unlike SD and Beta, which are desired to be lower, the Sharpe Ratio is preferred to be higher.
Every factsheet provides the scheme’s historical returns in comparison to its benchmark. While past performance is not a guarantee of future returns, it gives factual information about the funds’ performance. Returns generated by a scheme in excess to the benchmark returns are referred to as ‘Alpha’. Like Sharpe Ratio, Alpha is desired to be higher. Anything more than zero is considered to be a good alpha.
Portfolio Turnover Ratio
Portfolio Turnover Ratio (PTR) calculates the percentage of a fund’s holdings that have changed in a given year. Funds that are aggressively managed will tend to have a higher PTR as compared to those which prefer a buy-and-hold strategy. It is advisable to pick funds with lower/moderate PTR as it indicates well-researched and well-timed investments. A low turnover ratio indicates a buy-and-hold strategy.
Sectoral allocation and portfolio construction
A factsheet will help an investor understand the scheme’s exposure to stocks and the cash balance available. It also mentions the sectoral and company-wise allocation of the fund. This will give you a good idea of whether the portfolio is diversified or concentrated and whether the scheme is sticking to its objective.
Apart from the above points, the factsheet also covers other details such as benchmark, assets under management(AUM), fund managers, exit loads, NAVs of different plans, the expense ratio of different plans and portfolio turnover for equity funds. It shows portfolio holdings for the previous month across sectors and securities and also the fund’s historic performance in comparison to its benchmark and specifies the risk level of the fund. An investor is advised to always go through the basic details about the fund before investing. This will help them make informed decisions and decide on the right fund that is suitable to their investment profile and further diversify their portfolio.
Disclaimer: This press release represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
The information set out above is included for general information purposes only and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws as certified by the mutual funds consultant. Any action taken by you on the basis of the information contained herein is your responsibility alone. Axis Mutual Fund will not be liable in any manner for the consequences of such action taken by you. The information contained herein is not intended as an offer or solicitation for the purchase and sales of any schemes of Axis Mutual Fund.
Past performance may or may not be sustained in the future.
Stock(s) / Issuer(s)/ Sectors mentioned above are for illustration purpose and should not be construed as recommendation.