Four critical things that you should look in a MF Factsheet

Most of the mutual fund investors look at the NAV (Net Asset Value) of the mutual fund once they have invested in a particular scheme. Very few investors read the scheme related document before boarding a mutual fund scheme and even fewer follow the fact sheet that the mutual funds publish on a monthly basis, after they have invested in a scheme. What is the significance of fact sheet of mutual fund and why should an investor go through the fact sheet? Also since fact sheets have plethora of information, which are the critical variables that an investor should look forward to. Let us understand the four most critical piece of information that an investor should look at:

Sharpe Ratio: Most of the investors rarely look at this ratio. While it is not just important to look at the Sharpe Ratio, it is also important to note how the Sharpe Ratio of a scheme has deviated over a period of time. What does this ratio indicate and what is the significance of this ratio? The ratio gives an insight into risk adjusted performance of a mutual fund. In simple words, it is calculated by reducing risk free return from portfolio return and dividing the value by standard deviation of portfolio. This means that using Sharpe Ratio you will come to know whether a mutual fund has performed better because of investment decisions or by taking higher risks. If two funds have same returns, select the fund which has a higher Sharpe ratio.

R-Squared: This is a statistical measure that represents the percentage of a fund's movement that can be explained by movement in a benchmark index. In other words this means that to what extent a fund’s movement can be explained by the movement in the benchmark index against which it operates. Higher the r-squared value, higher the possibility of a fund’s return being in line with the movement of benchmark index. R-squared value of 1 or 100% shows that a fund’s movement is completely in tune with the movement in benchmark index.

Return against benchmark: The minimum that you can expect your fund to do is to beat the index against which it operates. If a fund is not able o beat the benchmark consistently, then it is a sign for you to leave the fund and look for something else. Additionally look at schemes return against the mark over a period of time and not just for a single period. Please note that a benchmark’s return can be easily replicated by an investor by investing in an index fund.

Portfolio Composition: Look at the portfolio composition of your scheme. It is the most important factors that drive return of your scheme. Some of important considerations in portfolio composition are how well diversified is the portfolio across sectors and also within sectors? Also check periodically id the stocks in the mutual fund portfolio are doing well or not. Look at beta and standard deviation of the portfolio to get a feel of risk factors in your portfolio.

Fact sheet is a very important document which an investor into mutual fund scheme can ill afford to ignore. Follow the fact sheets the way you follow NAV of the scheme.