27/06/2020 The mutual fund fact-sheet – Varsity by Zerodha

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Module 11 — Personal Finance

Chapter 8

The mutual fund fact-sheet

39

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

The number of fund houses – 43. 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 scheme – 2035. 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 AMCs – 26L 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 Investors – 2 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 –

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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 –

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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

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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
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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.
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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

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