Invest In India

Are you an NRI who has already invested or is considering investments in mutual funds? Do you depend on investment adviser for investment decisions? It’s imperative that you have knowledge of some important parameters for evaluating and selecting the best Mutual Funds suitable to your objectives. So what are the key elements that you should look for? A mutual fund fact sheet can help you find the answers to your queries.

Mutual fund fact sheets are monthly reports published by Asset Management Companies (AMCs). They provide relevant information about a fund and serve as guides for investors, both existing and new. Mutual funds are of 3 types – equity, debt, and balanced. Equity funds are high risk high returns funds with potential for fast growth. The five key elements of a Fact sheet are listed below.

Stock allocation

A good diversified fund should have less than 40% of Net Assets spread evenly across the top 10 stocks in its portfolio and no exceptional concentration in any of these. This helps the fund navigate safely during volatile periods. Stock picks must be consistent with no frequent churning of stocks by the fund manager over the past few months.

Sectoral allocation

Your fund must be well diversified across sectors apart from stocks. Sectoral concentration can be harmful unless the fund has a top-down investment approach. You must combine similar sectors, such as Auto and Ancillaries, when considering sectoral allocation. Different funds may categorize same companies across different sectors due to lack of standardization. Look for this anomaly when analyzing sectors.

Asset allocation

Don’t overlook asset allocation. This tells you about the spread of assets across stocks, current assets, and cash. Cash reserves of an equity fund can tell a lot. A high cash level may indicate a fund manager’s discomfort in staying fully invested in the market. Consistently high cash levels over a few months may probably indicate lack of good stock-picking opportunities. High cash reserves are a good sign in a crashing market, minimizing loss, but the fund must be fully invested in a rising market, maximizing returns.

Turnover ratio

This shows you the stock churning in a funds portfolio. It’s measured by considering the number of stocks bought and sold over a certain assessment period. A higher or lower Portfolio Turnover Ratio doesn’t matter as long as it‘s aligned with the funds investment philosophy. A high turnover ratio can be good for equity funds, though high trading costs bite into the returns. But Value funds must have low churning, as investments are usually long term.

Expense ratio and loads

Your mutual fund investment is expensive if its Expense Ratio is high. This ratio has a regulatory ceiling of 2.50% for equity and debt funds. You must check the entry and exit loads charged by the fund at the time of entry into and exit from the fund, respectively. NAVs are declared by funds after factoring in the expenses and loads.

Remember, a fund with an excellent track record but high expenses is a better investment than a fund with lower expenses but an average track record.

Besides these, you must check the fund’s objective, fund manager and investment team profile, fund performance over the past 3 years and performance vis-à-vis the objective, to ensure they’re aligned with your goals, before making decisions.