Investing can be a rewarding exercise, especially if done in an informed manner. Of all financial products, mutual funds tend to make high levels of disclosures, usually through the periodical `factsheets`.
As the name suggests, it contains all the facts pertaining to the various fund schemes of the asset management company. While the factsheet can have a lot of details, which may seem daunting at first sight, with some guidance, they can be understood without much difficulty.
An understanding of the factsheet would allow you to appreciate the entire workings behind the single figure called the NAV (net asset value) and make comparisons between different fund houses and schemes.
Below are some of the details you will find in a factsheet and some tips to understand them. All factsheets are available in the respective fund house`s Web site.
Fund views
All the monthly disclosures start with the views of the fund house on the fundamentals of the economy, equity and bond markets in the month gone by as well as that on its expectations, going forward.
In general, these articles talk about the major events that occurred over the month, which affected the markets and the inflows. In addition, some fund houses also give an account of the sectors that they are bullish on and the ones they are not so convinced. For example, one fund house may not believe in too much cash position being taken, another may take a conservative stance during market corrections and may move significantly into cash. Also, some fund houses, for example, may be cautious in infrastructure and realty stocks, despite their being beaten down, while others may suggest that there is scope for stock-specific selection. These articles make interesting reading, especially when markets fall or gain heavily (say 20%), as fund managers dwell on what helped or went against their funds.
Portfolio and returns
Moving on to subsequent pages, we get to individual schemes and their investments in various stocks and bonds. This is the most-followed part in a factsheet as the fund discloses the stocks and bonds that it has invested in. Some funds give their entire portfolio of stocks while others give out their top 10 holdings. In a similar fashion, funds also give details of sectors they are invested in.
It is important for investors to note if the fund takes concentrated exposure to stocks or sectors as it can then peg up the fund`s risk element. Gauging the fund`s investment style, therefore, can help investors put a finger to the fund`s risk profile and match it with their own. Exposure to individual stocks to the tune of, say, 10% of the portfolio makes it concentrated. In some cases, there may not be heavy exposure to individual stocks, but greater tendency to take increased positions on individual sectors when they are `hot` in the markets.
The fund also gives the returns it generated over a period of six months, one-, three- and five-years from the date of the factsheet. For comparison, the returns of the benchmark are also given. Note that most funds also give the returns that are generated through the SIP (Systematic Investment Plan) route. This may differ from the absolute returns that a lump-sum may have generated as SIPs are spread across market cycles and enable rupee-cost averaging.
Investors can use the data so provided to check whether the fund`s NAV change over a period of time has been more than the change in its corpus size over the same period. If yes, it suggests that the fund may have suffered higher outflows/redemptions, unless there was a dividend paid out. Checking on this trend will helps assess other investors` interest in the fund too.
The ratios
Standard deviation tells us how volatile the fund`s returns have been in relation to its average. The higher the number, the more volatile is the fund`s returns.
Sharpe ratio, another important performance metric, measures the risk-adjusted returns that the fund generates. In other words, it is the returns generated by the fund over risk-free returns, for a given unit of risk measured by the standard deviation.
Beta is the third important ratio that captures how much a fund`s returns move in relation to a change in its benchmark`s returns. A beta of 1 indicates that the fund moves in tandem with its benchmark, while a beta greater than one indicates that it rises and falls more than the benchmark. A beta of less than one suggests that the fund is less volatile than its benchmark.
Expense ratio is one of the most important measurement tools. It is the percentage of total assets that is paid as management fees and also covers the everyday costs of running a mutual fund. Actively-managed funds typically have higher expense ratio than those that are passively managed, such as index funds or ETFs as in this case it merely involves replicating the index.
All the above ratios must be used for comparing funds with similar mandates across fund houses. For example, if you own two funds that invest in large-cap stocks, it would enable you to see which is riskier and more expensive.
If it is not possible for you to examine factsheets every month, consider doing it at least on a quarterly basis. It would not only help you make sound buying or selling decisions; it is also a lot of fun!
No comments:
Post a Comment