Understand your fact sheet

Asset management companies regularly publish fact sheets containing information about their mutual fund schemes. Apart from being a statutory requirement (to disclose the fund's portfolio), the fact sheet also acts as a mouthpiece for AMCs: it's an opportunity to inform investors about how the fund management perceives the investment environment, changes within the AMC, etc.

For the investors, the fact sheet is an important document which informs them where their funds are being invested and how their funds are being managed. The key lies in deciphering the relevant bits of information provided in the fact sheet and ignoring the rest. We present a few pointers on how to read fact sheets and what fact sheets should ideally provide investors with.

1. Sectoral allocation

A concentrated portfolio across a few sectors would imply that the fund is over-leveraged and its risk profile is enhanced considerably in terms of being prone to volatility.

However the sector allocation for a given scheme can be window dressed to appear more diversified e.g. related sectors like auto, auto ancillaries, and motor cycles may all be presented separately. Investors should club such related sectors and then take a call on how well diversified the portfolio is.

2. Consistency

Information should be presented in the fact sheet in a consistent manner, e.g. assets under management should be consistently displayed in the same denomination. If the corpus size in a scheme falls from Rs 60.41 crore in March 2004 to Rs 59.94 crore in April 2004; the erosion can be concealed by presenting the asset size as Rs 599.4 million in the April 2004 fact sheet.

3. Expense ratio, loads, etc.

For many investors, the most important part of the fact sheet tends to be the "returns" and perhaps rightly so! However this emphasis on returns implies that other vital factors like the fund's expense ratio, the entry and exit loads, and turn over ratio (all of which have a bearing on your returns) are ignored.

While making a comparison between peers apart from the returns, see how the funds compare on these criteria as well.

4. Mandate

Every scheme is launched with a mandate, e.g. some balanced funds may invest up to 60 per cent of their corpus in equity instruments and the balance in debt instruments, similarly diversified equity schemes may be launched with a mandate to invest their entire holdings only in large cap stocks.

Keep track if your fund manager sticks to his mandate? Ideally he should; if your fund manager fails to do so, you could be compromising on your risk appetite e.g. a balanced fund with a 60 per cent equity investment mandate may invest 80 per cent of its corpus in equities thereby proving to be a high risk proposition.

5. Returns

Returns for mutual fund schemes are displayed on a compounded annualised basis, especially for periods in excess of one year. While the need to present the returns in the given form is a statutory requirement; investors should realise that returns computed using the compounded annualised growth rates (CAGR) can present a distorted picture. CAGR provides a smoothed return i.e. the steady rate of growth. A strong surge in the end period can have a positive impact on the historic returns as well.

Let us take an illustration to better explain this; Birla Advantage Fund (Growth Option)'s NAV registered a growth of 24.69 per cent during the period January 1, 1999 to December 31, 2003. Over a 5-year period, this is a fairly impressive growth rate. Now let's see how the NAV appreciated on a year-on-year basis during the 5-year period.

The real picture

The scheme has delivered negative returns for two years in a row followed by a mediocre performance in the third year. The saving grace has been the strong performances in the first and the final years respectively.

While the above list is not an exhaustive one, it provides guidelines to investors, which can help them make more informed decisions.