Module 11   Personal FinanceChapter 8

The mutual fund fact-sheet

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8.1 – The Mutual Fund world

In the previous chapter, we set up a hypothetical situation that helped us understand the concept of a fund and how it gets managed. We discussed the idea of ‘pooling of funds’ to invest in the market with a common purpose. I agree we oversimplified the previous chapter, but that’s ok as the objective at this point is to understand the fund structure and the way it serves its investors.

I also hope you are clear about the concept of ‘Net asset value or the NAV’. The mutual fund NAV or the mutual fund unit is an elementary concept, and I hope you have no confusion about this. If yes, I would urge you to read the previous chapter once again.

We will, in this chapter, take that conversation forward and look at one of the most crucial documents from a fund house, i.e. the Fund fact sheet. The factsheet is a document that puts up all the information related to a fund/scheme. By and large, everything that you need to know before investing in a particular fund is available in the fund fact sheet. In this chapter, we will look at fund factsheet and figure out how to read and understand the same.

Before we get to the fund’s fact sheet, I think it is essential to get a grip on how wide and deep the Indian Mutual fund industry is. The discussion will help you understand the length and breadth of the mutual fund industry –

So here are necessary details for you (as on Dec 2019) –

The number of fund houses43. These are the number of mutual fund companies who have obtained the AMC license from SEBI. Example: Kotak AMC, HDFC AMC, ICICI Pru AMC, Axis AMC, DSP etc.

The number of scheme2035. Each fund house (AMC), can run multiple schemes for people to invest. For example, ICICI Pru AMC runs 243 different schemes, probably the highest in the industry. Franklin AMC runs about 67, Aditya Birla AMC manages around 163 schemes. A scheme is a fund with a specific investment objective, more about this when we dig into the factsheet.

Money managed by AMCs26L Crore. This is the aggregate amount of money managed by the entire mutual fund industry (across all AMCs). For example, HDFC AMC, which is one of the largest AMC, manages about 3.7L Crs. Axis AMC, on the other hand, manages about 1.05L Crs. Yes AMC manages about 916 Crs. This money is coming in from retail individuals and corporates. Out of this 25.68L Crs, roughly 14.5L Cr is from retail investors like you and me, and about 12L Crs is from the corporates

The number of unique Investors2 Crs Indians. This is the number of individual investors investing in Mutual funds schemes across all the AMCs.

Again, these are good to know numbers to put things in some perspective. You need not have to know these numbers if your objective is to invest in the markets via mutual funds.

8.2 – The fund factsheet

An asset management company (AMC), manages and runs a mutual fund scheme. An AMC can run many schemes as long as they have SEBI’s approval for it. A mutual fund scheme is essentially a fund with a specific investment objective. An investment objective is the stated goal of the fund. For example, the investment objective of a mutual fund scheme could be an investment in the top 100 large-cap companies in the country or it could be an investment in the top 100 small-cap companies, so on and so forth. The investment objective is stated at the inception of the fund, and the fund manager is expected to stick to this mandate until the life of the fund.

So let us pick a fund fact sheet and dig into what information is available to us. Let us start with Kotak AMC.

By the way, I’ve randomly selected Kotak AMC, please don’t consider this as a recommendation of any sort 🙂

I can go to AMC’s website to find the fund’s factsheet. Here is the snapshot of the same –

 

 

As you can see, there are many different tabs right at the top – Equity, Tax Saver, Hybrid, Debt, Liquid etc. These are all different categories of funds. Over the next few chapters, we will understand what each of these categories means and what to expect from investments made in these categories. For now, let us stick to ‘Equity’ as a category. As you can see, there are many different funds/schemes under Equity as a category. Let us pick ‘Kotak Small Cap Fund’ and see what goes in the fact sheet. Click on the link, and you will find the fund’s factsheet. In Kotak’s case, they call this the ‘One Pager’. Fair enough.

SEBI has mandated that the name of the fund should be indicative of what the fund is like to do. So moment I read, ‘Kotak Small Cap Fund’, I know that this is a fund which focuses on small-cap investments.

I’ve downloaded the fund’s one-pager, and here is the very first page –

The introductory paragraph gives us information on the stated objective of the fund. As you can see, the stated objective says ‘Kotak Small Cap generates capital appreciation from a diversified portfolio of equity & equity-related securities by investing predominantly in the small market capitalisation companies across sectors’

From this, we can infer –

  1. The fund manager intends to have a diversified portfolio; therefore it is not focused on a specific sector
  2. Investments are in Equity and equity-related securities. This is mainly stocks
  3. Investments are predominantly in the small market capitalisation companies, which means as the fund name suggests, they look at investments in the small-cap company
  4. The second section talks a bit about how they intend to research these small-cap stocks. Frankly, this should not be of concern to you. I mean think about it – if you knew what to look for when investing in a stock or if you had an opinion on what makes a good stock, then you are better off investing in the stocks directly right? Why mutual funds at all?

But since the information is any way out there, here is a sneak peek into their research methodology –

  • Look at the integrity of the promoters – necessarily ensure they are not scammy
  • Ability to generate cashflow – meaning they look for companies that are operationally profitable and capable of producing a surplus over all the expenses
  • Experience of market cycles – ensure that the company has survived through the test of times and has proved its resilience
  • Simple business model – No complicated verticals and easy to understand companies
  • Quality metrics – This means that all the financial ratios tick right
  • Business quality – Good quality business I guess J
  • Low leverage – Companies with very little or zero debt

Now, I can decipher this because I belong to the same industry. However, most of the investors cannot read through these terms, and frankly, as I mentioned earlier, you don’t have to worry about this.

8.3 – Other fund facts

The fund fact sheet presents a lot more interesting data points. We will also use this opportunity to understand some of the key jargons used in the mutual fund world. Here is the snapshot for the fund’s other facts –

 

The initial section is the investment objective, which we reviewed earlier, so we will skip this section. The next thing you can notice is the benchmark of the fund. A mutual fund scheme should essentially benchmark itself to an index. This is required to evaluate the performance of the fund over a period. A mutual fund should have the appropriate benchmark. For example, a small-cap fund is benchmarked against a small-cap index, as in this case. It is almost mis-spelling if the benchmark is not appropriate, for example, a small-cap fund being benchmarked against a large-cap index. To put this context, the performance of a family car such as Wagon R should benchmarked against another family car such as maybe a Swift, and it would be futile to benchmark it against a Ferrari.

The next section details the type of scheme; there are a couple of exciting things to note here. The type is– Open-ended, equity, growth scheme. There are three critical parameters here; let us understand what it means.

Open-ended – When an AMC starts a fund, they have the option to let that fund run for either a fixed period or keep it going forever. For example, I can start a fund today and let it run for three years from today, at the end of 3rd year, the fund will cease to exist, and the investor is obligated to collect his money back (along with the profit or losses). Funds with such defined time are called a ‘closes ended fund’. If a fund does not have an expiry date, then it’s called an open-ended fund. For all practical purposes, its always good to deal with an open-ended fund

Equity – This is a reference to the asset class the mutual fund invests. Equity, as you know, refers to the shares listed in the market. Another asset class is debt, which could be either corporate debt or PSU debt. More on this when we deep dive into debt funds

Growth – Let us skip this for now. We will discuss this in a bit.

Apart from this, this section also details a few other things –

Fund Manager – I find this interesting to know who is managing the fund. I do a quick google search to know his background and his past performance. After all, he will be responsible for managing our hard-earned money, so it makes sense to see a bit about his background

Allotment date – This is the date from which the fund commenced its operations. The allotment date gives you a sense of how old the fund is. It is not that it matters, but the older the fund, slightly easy it gets to analyse vis a viz a new fund.

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

Regular plan – This is interesting. Think about a farmer growing onions. He nurtures the onion saplings, waters it, weeds it, and eventually harvests it and gets the onion ready for consumption. Let us say the cost of the onion is about Rs.30/- per Kg at this point. An intermediary now acts as an ‘agent’ and delivers the onion to people like you and me, and we, in turn, pay him Rs.40/- per Kg. The delta (Rs.10), is what the agent earns. Now replace the farmer with the AMC, the onions with a fund/scheme, and the agent as a mutual fund distributor. The mutual fund distributor is like the middleman between the AMC and the investor. If a mutual fund distributor approaches you and sells you a mutual fund, then he is selling you a ‘regular plan’, which means he is entitled to receive a commission from the AMC for selling this fund to you. There is nothing wrong with this, except that the money is going from your pocket.

Direct plan – Now you don’t need to buy the fund via a distributor. If you know which fund to buy, capable of doing your mutual fund research (which by the way is the end objective of this module), then you can buy that fund directly from the AMC. When you buy directly from the AMC, then there is no distributor involved; hence the distributor commissions are not paid, which means you save on commissions, which naturally means a better return on your investment.

Just to let you know, when you buy mutual funds via Zerodha, you are buying a direct plan; hence you will enjoy a better return. We will deep dive into this topic later in this module, but for now, remember when you invest in mutual funds, opt for a direct plan as you will save on commissions and therefore enjoy the better return.

The other bit in this section is about the option. As you can see, this fund has two options –

Dividend payout – Think about it, when you buy a stock of a company and the company issues a dividend, then as an investor, you are entitled to receive these dividends right? Likewise, when the fund manager buys the stock of a company, and the company issues a dividend, then the AMC receives this divided. Since the funds with the AMC belongs to the investors, this dividend belongs to the investors. The dividend you are entitled to obtain from the AMC is to the extent you’ve invested in the fund. The AMC gives you two options – you can withdraw this dividend, or you can choose to reinvest the dividend amount and buy more units of the fund. The dividend payout option helps you withdraw the dividend as and when the dividend gets paid.

There are technicalities here as to how the AMCs issue dividends. We will discuss this at a later point.

Dividend reinvestment plan  – This plan receives the dividend on your behalf and reinvests the dividend into the same fund. So necessarily, you don’t get the dividend in the form of cash, but instead more units or NAV of the same fund.

Growth plan – In the growth plan, the investor does not receive any dividends. The profits earned are ploughed back to fund and therefore the ‘compounding effect’, works well here. I personally prefer this plan over the other two.

Next up is the SIP details. SIP stands for ‘systematic investment plan’. In a typical SIP, you will invest the same amount of money every month for as many years as possible. Example of a SIP is investing say Rs.5000/- in Kotak Small-cap fund on 5th of every month for as many months as possible. Think of SIP as investing in instalments. SIP is perhaps one of the most significant financial inventions and has many merits to it. Given the importance of this topic, I think a separate chapter on this topic is justified, and we will do that at a later point. For now, think of SIP in its basic form, i.e. to invest a fixed amount of money every month in the same fund for many years.

As you can see, you can SIP on Kotak Small-cap fund, but for that, the AMC has specified that the minimum SIP amount every month is Rs.1000/- and the minimum number of months is six.

The next section talks about the initial minimum investment in the fund. This is self-explanatory, if you choose not to SIP, then the minimum amount to invest is Rs.500/- and Rs.1000/- for the monthly SIP.

The last section of the fact sheet talks about the load structure of the fund. There is a mention of few terms here like the SIP, STP, switches etc. We will club all these in the SIP chapter. For now, let’s talk about the ‘load structure’.

The load structure is essentially the amount of money, in percentage terms; you will have to pay in case you wish to withdraw from the fund. As you can see, there are two types of load structure –

Entry load –  This is no longer applicable. However, years ago, you’d have to pay a percentage for investing your money in a mutual fund. I guess AMC’s have to mention ‘entry load’ as nil for legacy reasons.

Exit load – This is the amount of money you will have to pay at the time of withdrawal. As you can see, there is a 1% load if you wish to withdraw before the completion of 1 year and no-load post that.

8.4 – Riskometer

Every AMC is supposed to self-asses the riskiness of the fund and lets the customers know about this. The self-assessment is something that SEBI mandates to avoid cases of the misspelling of the financial product. For example, a small-cap fund should not be packaged as a low-risk fund and sold to the investors.

Here is how the AMC does a self-assessment of risk –

The needle of the riskometer points to ‘moderately high’, meaning that the Kotak Smallcap fund is risky. The text next to the riskometer reiterates this. Now, agreed this is a risky fund, but that should not stop you from investing in risky funds.

Remember, the antidote for ‘risk’ in the mutual fund world is ‘time’; hence the longer you stay invested in a mutual fund, the safer it gets.

More on this in the next few chapters, so stay tuned.

Key takeaways from this chapter

  1. The factsheet of a mutual fund details all the essential parameters worth knowing about the mutual fund
  2. The investment objective of a fund is essentially the guiding principle for the investment the fund manager makes
  3. Open-ended funds don’t have an ‘expiry’ for the fund. It can go on forever
  4. Close-ended funds are time-bound
  5. Regular plans pay out distributor commissions, hence lower yield to investors
  6. The direct plan does not pay distributor commissions; hence the returns are higher for the investor
  7. The MF investor can choose to receive or reinvest the dividends
  8. Riskometer is a self-assessment of risk by the AMC

 

67 comments

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  1. Himanshu Arora says:

    Love ur work Karthik, BIG FAN..!!!..keep enlightening us..thanks a ton, in all the PAST, PRESENT and the FUTURE tenses.
    Coming to the chapter, In the benchmark description, don’t know if its in the pipeline, but can u plz include a table citing the various benchmarks and their applications and also the meaning of TRI and other such prefixes and suffixes given with those benchmark names. Thank You

  2. Abhishek says:

    Hi Sir,

    what’s the source of details like the number of unique investors?

  3. Anand Puranikmath says:

    Sir, This chapter provides a lot of information about mutual fund fact sheet but we don’t have the time to read the fact sheets of all the mutual funds so I go by the star ratings/rankings given to mutual funds by different apps, how reliable are those rankings and is it wrong to only see the ratings before investing.

    • Karthik Rangappa says:

      Sir, a bit of effort to know the fund is justified no? After all, you are putting your hard-earned money in the fund. Btw, the rating bit too is good to know, more on that in the coming chapters.

  4. Mayank says:

    Is there any difference between Dividend reinvestment plan & Growth plan as in both the cases dividends are being reinvested.

    • Karthik Rangappa says:

      Hmm, yes. Dividend reinvestment pays out the dividend and then reinvests the same back into the fund. So you need to pay taxes on it. Growth does not do this.

  5. kiranintouch says:

    Dear Karthik,

    Thanks again for taking your time and educating us. While we wait for the chapter that tells us how to choose a mutual fund, i have a request. I have already invested my capital in mutual funds and am targeting to achieve portfolio distribution of 50% (equity) and 50%(debt). In this context, i currently have some capital which i would need to invest in a debt fund. Request to guide me to material which i can refer to make investment in debt funds.

    • Karthik Rangappa says:

      Kiran, I think there is some material in Value research or Morningstar. But yes, eventually will cover it here as well.

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