Use fact sheet to understand the fund manager's performance

How do you evaluate which mutual fund scheme to invest in? Do you look at the performance numbers? Which is the most reliable source of information? How do you look at the numbers? Read my article in Mid-day to get answers to these questions ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/25052015/25052015-md-gm-10.pdf


The English translation is as under:
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“How do I evaluate the performance of a mutual fund scheme? How do I know if the fund manager has done a good job in managing money?”

Someone who has understood how mutual funds work would surely consider these questions before selecting a mutual fund scheme. It is important for anyone to understand that one is investing in a mutual fund scheme and not in a company. A portfolio manager, popularly known as a fund manager, manages the scheme. The skills and abilities of the fund manager or the fund management team play a big role. Thus, understanding the abilities of the fund manager is critical to evaluation of mutual funds.

The fact sheet comes to help here. The details of performance of each of the schemes managed by the respective fund house are available in the fact sheet.

Before we talk about the scheme performance details mentioned in the fact sheet, it is important to understand one more concept about mutual funds. These are relative return products and not absolute return ones. The former’s performance depends on how its market functions, whereas the latter is not fully dependent on only one market. Hence, the latter is expected to deliver positive returns in all markets, whereas the former is expected to outperform its benchmark.

As already mentioned, mutual funds are relative return products and hence the performance has to be seen in comparison to a benchmark. A mutual fund investing in large companies is likely to be benchmarked against S&P BSE Sensex or CNX Nifty. At the same time, a banking sector fund may be benchmarked against CNX Bank Nifty. Thus, an appropriate benchmark allows us to understand the relative performance of the scheme.

Thus, the fact sheet contains information of fund performance along with the benchmark performance. At the same time, SEBI felt that a small investor might not have easy access to certain special benchmark indices. Hence, as per SEBI guidelines, all equity funds must also show their performance against S&P BSE Sensex or CNX Nifty. Similarly, SEBI has defined general benchmarks for various categories of mutual fund schemes.

The fact sheet contains historic performance data for each of the schemes managed by the fund house. The data might be presented either in tabular format or both tabular and graphical formats.

The data is about how the scheme has performed in the past few years as well as since its inception. The table would contain performance data for last one year, last two years and last three years along with performance of the scheme since inception.

While this is good information, there is a limitation. If the last one year has seen extreme performance (either upside or downside), it can influence the numbers for the other periods, too. Last two years contain last one year period and last three years contain both the last one and two year periods.

We will use Cheteshwar Pujara’s example to explain the above point.

Pujara’s batting average was 71.25 runs in just his first 6 test matches. In winning matches, he averages an impressive 81.14. These numbers look flattering and tend to justify the comparison with the “Great Wall” – Rahul Dravid. However, looking at mere averages is never the appropriate thing to do. So let us analyse the numbers now.

Tests	Innings	Not Out	Runs	Average
6	10	2	570	71.25

Out of the above, he scored 247 in his last two innings and remained not out in both the innings. If you exclude these two knocks, the statistics look like this:

Tests	Innings	Not Out	Runs	Average
5	8	0	343	40.375

This also is by no means a bad average. However, just one match and two innings improved his batting average, dramatically.

SEBI guidelines also warrant the mutual fund companies to show the scheme performance for the last three discrete years. This removes the above problem that happened due to overlap.

While analyzing the scheme performance, it is critical to keep the above point in mind.

While we talked about the influence of the latest period over the scheme performance, one must also check the fund manager’s performance across the various schemes one manages. You can see the fund manager’s overall performance across schemes, which indicates if the manager is good only in a particular type of scheme or generally a brilliant manager.

The fact sheet also illustrates scheme performance for SIPs. This is also an important date that one can use.

So go ahead and evaluate the schemes with the help of the fact sheet.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.

Disclaimer: This article should not be construed as investment advice.