Mutual Fund offer document. 10 most important point to look in an offer document.

Published: 02nd February 2008
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Mutual fund offer documents and Mutual Fund fact sheet

The Mutual Fund offer document and the fact sheet carry certain information that can give a great deal of detail about the fund, its past performance in terms of returns. Most of the fact sheet or offer documents published by the Asset management companies are of similar standard and the data provided by the AMC in these fact sheets are of importance to the investors. The investor should know what to look at in these fact sheets and offer document. Since the fact sheet act as a guide, the investors should take its guidance to get more information on the schemes of mutual fund companies.

If the mutual fund investor is informed, the probability of him getting good returns is very high. So for the uninformed investors of mutual fund we had put certain points and notes that they should look at when they are going through a fact sheet.

Under the category of mutual funds the Equity fund fact sheet and debt fund fact sheet both need to be properly analyzed on the basis of certain points which are mentioned below.


1. Investment objective: The mutual fund's investment objective states what it aims to achieve i.e. capital appreciation, income generation among others. It could also inform the investor about the investment style of the fund and the kind of risk it is prepared to take for achieving its investment objective. Ideally, an investment objective should be pointed enough for the investor to understand whether his own investment objective fits well with that of the mutual fund. For instance, an investment objective that states that the fund will 'attempt to generate capital appreciation by investing significantly in the mid cap segment', it tells the investor that it is likely to be a high risk - high return investment. If the investor has the risk appetite for such an investment he can consider investing in the fund.

2. Allocation of stock: Allocation of stocks by the Asset management companies are shown in the factsheet, the composition of portfolio are shown properly so that all those investor who have invested in the mutual fund or those who wish to invest in the fund can get an proper view of the style of mutual fund management by the AMC'S. When we look at the stock allocation of the AMC's we can judge the level of diversification by taking into consideration the top 10 stocks in their portfolio. We believe that if a fund has more than forty percent in the top 10 stocks than it is not properly diversified. In a volatile situation a mutual fund which is well diversified will be more effective then sectoral flavor funds. Many times it is noticed that the whole portfolio is well diversified but one single stock is holding such a high investment that the balance of diversification cannot be maintained. This can turn out to be risky proposition for a pure diversified equity funds.

3. Allocation of sectors: A well diversified equity fund need to be diversified not only on the basis of stocks but it need to be well diversified across sectors too. When we evaluate or analyze a mutual fund it is not enough to evaluate the stock allocation but also the sectoral allocation. If a mutual fund is not well diversified across sector it may get into trouble if there is a sudden crash in the market. While calculating the sectoral allocation, the investor must combine like-natured sectors to understand the level of sectoral diversification.

4. Allocation of asset: Asset allocation let you know how the funds assets are diversified across stocks, sectors, and current assets/cash. With the detail of stocks and sectors, this is another thing that need to be taken care of. A fund manager had to decide the allocation to cash. The allocation to cash is in itself an important decision. By looking at the factsheet we can note down the allocation to cash by the equity fund. If the fund manager is holding to cash for some time, this means that he is waiting for the right opportunity or it means that he is not getting enough stock-picking opportunity at this point of time. Allocation to cash can be beneficial if the market takes a down turn, as a good portion is in cash which is not affected by the crash, where as stock allocation will take a beating. But a good allocation to cash can go against the mutual fund at the time of market upswing.

5. Portfolio Turnover Ratio: A portfolio turnover ratio tells the investor how much churning the mutual fund has witnessed over the period of time. The basis of this calculation is the number of equity shares brought or sold by the equity fund over the review period. High turn over indicates high churning by the fund house. Churning of funds should be in line with the funds investment philosophy. High churning can be good or can be bad for the fund, as I said it depends on the investment philosophy. For example a growth fund will witness high turnover as the churning is high where as a value fund will have low turnover because the churning will be low as the fund manager invest for a long term.

The portfolio turnover ratio is not given much importance by the fund houses in their factsheets as it will open their stock picking decisions in front of the investors, who can further compare it and find out the weight age to their decisions.

6. Expense Ratio: The expense ratio shows us the expensive nature of the mutual fund. It shows us how expensive the mutual fund is for us. If an expense ratio is high it tells us that the mutual fund is expensive. In this expense ratio the fund management expenses form a large part. This fund management expense should decline with increase in net asset of the fund. The fund house as per regulation has to declare the expense ratio so that the investors can come to know the expensive nature of the fund.

7. Information on the Fund manager: Fund manager is the person who is managing the mutual funds. Some of the companies go for individual fund manager rather than a team of fund manager i.e. an investment team. But over a period of time it is better that an investment team managers manages your money rather than a individual star fund manager. Individual fund manager can quit the fund house any time thus affecting the stability of your fund. Therefore you need to check out the detail of the fund manager of the fund house or detail of their fund management team, so that you can verify and compare the fund houses on the basis of it. It is better to go for the fund house which has got stability in the fund management process


8. Average maturity: In a debt fund factsheet this is on of the most important aspect to look into. In order to understand the fund manager's view on debt market the investor has to go several months behind to see how the average maturity has moved. If the fund manager is maintaining a higher average maturity for quite sometime, it implies that the fund manager is expecting the interest rate to fall over the period of time. But if the average maturity is lower it means that the fund manager is expecting the interest rates to go up.

9. Credit Rating Profile: Credit rating of the securities in which debt fund invest varies. Therefore investors should check out the credit ratings of the securities of their debt funds. Most of the debt funds do not take much of credit risk. They invest in high rated securities. AAA/Sovereign paper which carry the lowest credit risk, attract the highest investments. Where as AA+/AA carry high credit risk.

10. Allocation to asset: Asset allocation in debt funds are again very important for the investors to look at. This will help him understand the risk a fund manager is taking and also the kind of approach the fund manager is taking towards the investment. The debt funds invest mainly in government securities and corporate bonds. Both of them carry varying risk.

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