As mutual funds become the preferred route of investment for many, an enhanced understanding of associated terms can help one become a better investor. Asset Management Companies (AMCs) publish an important document called the factsheet that acts as a monthly report detailing information for each active scheme. Nowadays, this is easily available online on an AMC’s website. The information contained in it can also be found on various mutual fund research websites.

Decoding a factsheet requires an understanding of its various elements. Let’s look at some of the most important ones.

Scheme-related information

Typically, the top section of a factsheet provides useful scheme-related information that tells you about the fund manager’s strategy - whether they invest in small cap, mid cap or large cap assets. The factsheet will also give details of the fund manager - the person ultimately responsible for managing fund money and fund performance. Because the manager directly impacts your returns, it is important to know their track record. The factsheet will also lay out an investment objective, a general statement indicating the objective of the scheme - capital appreciation or income or both.

Sector-related information

If the fund’s allocation is biased towards a few sectors, it is riskier but with a higher potential for returns. When maintained over a period of time, biased sector allocation signifies the fund manager’s faith in certain sectors, depending on their business cycle stages. While cyclical sectors (banks, automobiles, capital goods, cement etc.) are seen as risky, they offer great returns in the early and mid stages of a bull market. At the peak of a bull or bear market, defensive sectors (pharmaceuticals, FMCG etc.) tend to outperform.

Company concentration

The factsheet also gives the stock holding details of the scheme. Instead of focusing on individual names, investors should focus on company concentration, which tells you what percentage of your investment is at risk. You can calculate company concentration by adding the weights of the top five or ten companies. If the weight of the ten largest stockholdings is within 50% and the weight of the five largest stockholdings is within 30% of the portfolio value, the company concentration risk is acceptable.

NAV and return

The factsheet also shows the NAVs and returns of different scheme options. Because the returns given in most factsheets are trailing over different time-scales, investors might find it difficult to visualise their percentage annualised returns. They can then think of the growth of Rs. 10,000 to understand the wealth the scheme created over different time periods

Active stock allocation versus benchmark

Active Stock Allocation versus Benchmark tells the investors which active stocks are overweight or underweight versus the benchmark. However, investors must understand that overweight and underweight are relative concepts. Being underweight on a stock does not necessarily mean the fund manager is bearish on it. In the case of redemptions, instead of selling shares of all stocks in the portfolio, the manager may selectively sell a few stocks he is underweight on to achieve the best results for unit holders who remain invested. Similarly, when there are fresh flows in the scheme, the fund manager would buy shares of those stocks he is overweight on to create higher alphas for investors.

Market capitalisation

The weighted average market cap of the scheme portfolio is the average of market cap of all the stocks weighted by their proportions in the portfolio. When all stocks in the portfolio are listed in an ascending order of market cap, the market cap of the stock in the middle is the median market cap.

Assets under management (AUM)

The average AUM is the average of the assets under management of the scheme at the beginning

Turnover ratio

This is a measure of how much of the portfolio changed in the past year. A ratio of 100% means that the fund manager replaced all holdings once in the last year. Most experts believe that a low turnover ratio is good since it reveals a “buy and hold” approach. However, some investment experts believe that managers who churn their portfolios more look to actively exploit market opportunities based on valuation differentials.

SIP returns

This powerful tool explains the wealth creation potential of the scheme using systematic investment plan (SIP). It shows how much wealth could have been created through a monthly SIP in the scheme over various time periods