Mutual Fund Fact Sheet A Comprehensive Guide Unlocking the Secrets of MF Factsheets

In the previous chapter, a hypothetical case was arranged to help us grasp the idea of a fund and how its managed. We looked at the possibility of ‘pooling of funds’ towards investing in the market with a common objective.

I trust that you are familiar with the term ‘Net Asset Value‘ or NAV. It is a core concept and I am hopeful that there is no confusion. However, if not, please take the time to read the previous chapter again.

In this chapter, we will delve deeper into one of the most important documents issued by a fund house – the Fund Factsheet. It provides key information about a particular fund/scheme and comprises all relevant details that investors need to consider before investing. We will explore how to read and understand the Factsheet.

Before we start to go over the fund’s fact sheet, I believe it is important to understand just how expansive and far-reaching the Indian Mutual fund industry is. This discussion should help you get an accurate picture of the magnitude of this mutual fund industry.

Here are some details:

There are around 45 fund houses holding an AMC licence granted by SEBI, such as Kotak AMC, HDFC AMC, ICICI Pru AMC, Axis AMC and DSP.

The AMC (Fund House) count is 1510, each with a specific investment objective. Nippon AMC offers the highest number of schemes -145- while SBI and ICICI Pru are further behind in the industry with 144 and 143 respectively. All this is revealed upon reading the factsheet on each Fund or Scheme.

The entire mutual fund industry, represented by the top three AMCs, SBI, Axis and Yes, has an aggregate amount of 35L Crores of money under their management. Specifically, SBI AMC manages 5.23L Crs, Axis AMC holds 2.08 L Crs, and Yes AMC oversees 81Crs. This pool largely consists of funds from retail individuals (18.85L Crs) and corporates (16.30L Crs).

Over 2.39 crore Indians are investing in Mutual Funds schemes offered by different Asset Management Companies (AMCs). This makes it a popular investment choice for a sizable portion of the population.

These are useful figures to keep in mind, particularly if you’re interested in investing in stocks or funds. There’s no need to memorise them if you simply want to commit your money to mutual funds.

– What Is a Mutual Fund Fact Sheet?The fund factsheet

An asset management company (AMC) oversees and manages a mutual fund scheme. With SEBI’s approval, they may hold multiple schemes with different investment objectives. These objectives are clarified when the fund is began, and the fund manager must stick to them until its closure. These objectives could be investment in large or small-cap companies, among others.

Let us take a look at the fund facts sheet of Kotak AMC, to uncover what information is available.

I just happened to choose Kotak AMC randomly, but I’m not suggesting it in any way.

I can access the fund’s factsheet on AMC’s website. Here is a snapshot of it –

As you can see, there are several tabs available at the top – Equity, Tax Saver, Hybrid, Debt, Liquid etc. These sects signify various funds. We will understand what each of these offer and how to invest in them over the next few chapters. Focusing on Equity for now, there are many funds/schemes within this category. We shall pick ‘Kotak Small Cap Fund’ and navigate towards its factsheet. You can click on the link provided and find the fund’s “One Pager” which provides all relevant details about it!

SEBI has mandated that funds must have a name that reflects its investment strategy. With ‘Kotak Small Cap Fund’, it’s immediately obvious that this fund focuses on small-cap investments.

I accessed the one-pager of the fund and here is the initial page –

The introductory paragraph provides us with details about the goal of the fund. It is clear that Kotak Small Cap looks to generate capital appreciation from investments in a diverse variety of equity and equity-linked securities, chiefly consisting of small market cap firms hailing from multiple sectors.

It is possible to draw a conclusion from this information.

The fund manager looks to have a diversified portfolio, not concentrating on one sector.

Investments are in Equity and equity-related securities. This is mainly stocks

The fund, as its moniker implies, focuses largely on investments in small market capitalisation companies. Thus, the fund puts its emphasis on opportunities presented by the small-cap company arena.

The second section mentions the way they mean to research small-cap stocks, and that should be of no bother to you. If you can figure out what traits are beneficial for investing in a stock, or have your own ideas about it, then why would mutual funds even factor into the equation? Investing in a stock directly is likely a better option.

Since the data is available, here is an insight into their research process.

– Examine the integrity of the promoters, to verify that they are not fraudulent.

– A focus on generating cash flow, prioritising companies that can operate profitably and generate a surplus over their expenses.

– The company should have survived through the test of time and proved itself.

– The company should have a simple business model.

Quality metrics indicate that all financial ratios are satisfactory.

Business quality is essential for any organisation.

The company should have very little or zero debt.

– Other fund facts

The fund fact sheet offers a variety of intriguing facts. Additionally, it provides a perfect platform to grasp the essential vernacular encountered in the mutual fund discourse. The following is an overview of other important data points –

The initial section, the investment objective, was reviewed before so it can be skipped. Next is the benchmark of the fund. Mutual funds need an appropriate index to measure their performance over time. In other words, a small-cap fund should be compared to a small-cap index. If this isn’t done correctly, it could potentially be mis-selling. To put it in context, if you were to compare the performance of a Wagon R to a Ferrari, it would make more sense to compare it with another family car such as the Swift.

In the following section, this Open-ended equity growth scheme is explored. It is important to note three key features here. Let us take a closer look at them.

When starting a fund, AMC’s have the choice to allow it to run for either a fixed duration or keep it running indefinitely. An example of this is I am able to create a fund today which will exist for three years; when the third year has passed, both investors and any profits/losses associated with the fund must be collected back. Funds like this with an assigned time span are known as closed-ended funds. If no end date is set, then it is referred to as an open-ended fund. Generally, it is advisable to work with an open-ended fund.

Equity-

Equity refers to the shares listed in the market, which are the asset class mutual funds invest in. Another asset to note is debt, which could consist of either corporate or PSU bonds – we will further explore this during our deep dive into debt funds.

Growth- (we will discuss this in detail later

In addition to this, this area also outlines a few additional items –

Fund Manager- It’s essential to find out more about the fund manager – a quick Google search can give a good indication of their background and performance history. He or she is responsible for handling our capital, so it pays to be thorough in our research.

Allotment date – The allotment date of a fund is the starting point of its operations. This can help you to gauge the fund’s age and, while this may not be significant, it can be advantageous when appraising it against newer funds.

The next section deals with ‘Plans & Options’. Under plans, there are two variants –

Regular plan- Consider a farmer who grows onions. After tending the saplings, watering them, and weeds the field; he prepares them for sale by harvesting them. If we assume 1 Kg of onions cost Rs.30/-, then an intermediary acts as an ‘agent’ to deliver it to us for Rs.40/-. This difference is what earns the agent a commission from the AMC when a regular plan is sold to an investor like you and me. While there is nothing wrong with this concept of commission-based earning; it’s worth noting that some of our hard-earned money is going into the hands of the middleman.

If you know which mutual fund to purchase and have done your research, you can now buy it directly from the AMC without involving a distributor. This means that the distributor commissions are not paid, allowing you to potentially receive a better return on your investment.

This section also covers the two options available for this fund –

Dividend payout – When investing in a company’s stock, as a stockholder you are entitled to any dividends issued by that company. Similarly, when a fund manager buys the stock of the same company, the Asset Management Company (AMC) receives these dividends on behalf of the investors. This dividend amount is equivalent to the proportion in which you have invested in the fund. The AMC allows you to choose between two options for receiving this dividend – either withdraw it, or opt to reinvest it and buy more units of the fund. The latter option, called “Payout of Income Distribution cum capital withdrawal”, thus provides investors with an effective way of managing their dividends.

We will delve further into the intricacies of how the AMCs issue dividends at a later stage.

Dividend reinvestment plan  –The Dividend Reinvestment Plan is where dividends are taken directly from the fund and reinvested, meaning you don’t receive a cash payout. This option is also known as the ‘Reinvestment of Income Distribution cum Capital Withdrawal’ Choice.

Growth plan – In my opinion, the growth plan is the best of the three options. It involves reinvesting profits earned and allowing the ‘compounding effect’ to take place, providing greater potential for gains than receiving dividends.

Let’s talk about SIPs. They are ‘systematic investment plans’ and involve investing a fixed amount of money every month in the same fund for as long a period as possible. An example would be investing Rs.5000/- in Kotak Small-cap fund on the 5th of every month for an extended period. SIPs are one of the most important financial inventions, due to their numerous merits. Therefore, I think it’s worth giving this topic its own chapter, which we will explore later on. For now, consider SIPs in their basic form – setting monetary goals, and slowly but surely reaching them through periodic investment.

You can invest in Kotak Small-cap fund through SIP. The AMC has set a minimum of Rs.1000/- per month for the duration of six months or more.

The next section discusses the minimum investment into the fund. For those choosing not to opt for a SIP, the amount to be invested is Rs.500/- while those selecting the monthly option must commit Rs.1000/-.

The last part of the fact sheet details the fund’s load structure. Terms like SIP, STP and switches are bundled in the SIP chapter. Right now, let us focus on the ‘load structure’.

The load structure of a fund is the sum one must pay as a proportion of their withdrawal. There are two variations of this –

Entry load- It  was something that had to be paid in the past when investing in a mutual fund; now however, it is no longer applicable. Perhaps AMC’s still mention ‘entry load’ as nil for historical reasons.

Exit load – You will incur a 1% charge should you wish to withdraw prior to one year, but no fee applies after completion of that period.

– Riskometer

Self-assessment is a process mandated by SEBI to prevent misselling of financial products. For instance, small-cap funds should not be labelled as low-risk and sold to investors. AMC’s are expected to evaluate the riskiness of their fund and inform clients accordingly.

This is the approach taken by the AMC when assessing risk –

The needle of the riskometer points to ‘very high’, indicating that the Kotak Smallcap fund is a risky investment. This is echoed in the accompanying text. While it’s true that this fund carries more risk than others, this should not be a deterrent to potential investors.

Take note, when it comes to mutual funds, ‘time’ is the key to minimising risk. Consequently, if you invest in a mutual fund for a long period of time, you are reducing your risk.