Monday, May 25, 2015

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 ...

The English translation is as under:
“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.
Not Out
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:
Not Out
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.

Monday, May 11, 2015

Moneycontrol chat 11-May-2015

Below is the link to my chat on today

Moneycontrol chat session

Understanding the risks of a concentrated portfolio

Read my article on the captioned subject ...

Risks of a concentrated portfolio

The English translation is as under:

In some of our earlier articles, we mentioned about the benefit of transparency offered by mutual funds. There are several documents that enable one to take an informed investment decision. Fact sheet is one such document. Though it is not one of the mandatory documents, it is extremely important for an existing as well as a prospective investor. The mutual fund companies publish the fact sheet every month.
The most sought after information in the fact sheet is the portfolio of investment for each of the fund schemes. Though you may find some fact sheets containing top 10 holdings in a portfolio; whereas in most cases, you would find the list of all the securities held by the fund scheme. It allows different people to evaluate the scheme in different ways. Some look at the portfolio to see the kind of securities the fund is holding. A detailed analysis of the top securities gives one some idea about the prospects of the scheme. A better way of looking at the portfolio of holdings is to understand the style of the fund manager. Once you have invested with a fund manager, it makes more sense to evaluate the fund manager’s style rather than evaluating the securities individually.
The portfolio holding statement helps look at certain risks that the portfolio manager is taking in order to generate higher returns. At this stage, it is important to clarify that risk is not necessarily bad. An investor (in this case, a fund manager) takes certain calculated risks in order to deliver good returns. If the manager’s judgment is correct, the portfolio delivers good returns. However, if the judgment is not good, one may see inferior performance.
We will look at the equity funds and debt funds separately and see what the fact sheet can tell us.
Let us start with the equity funds.
One can start with checking whether the portfolio is concentrated. When a fund manager has high level of conviction in certain stocks or sectors, one is likely to have a concentrated position. If the fund manager’s view turns out to be correct, there are huge gains to be made. At the same time, if the prices move against the fund manager’s judgment, the portfolio would underperform. As compared to a concentrated portfolio, a portfolio diversified across stocks and sectors would be protected from downfall in the prices of few stocks.
Some funds may also mandate the fund manager to take concentrated positions. This may be checked from the fund’s Scheme Information Document.
You may check for concentration among stocks or sectors. Check for investment in the stock as percentage of the total (this is explicitly mentioned in the fact sheet).
According to SEBI guidelines, a scheme cannot investment more than 10% of the AUM in an individual stock. However, if due to some reasons, the holding goes beyond 10% afterwards, there is no need to sell the stock. One can continue to hold, but cannot add more. There are many reasons why the stock holding may cross this 10% limit. It could be on account of faster rise in the price of the top holding as compared to all the other holdings, or the fund manager might have sold some other stocks to fund redemptions or to pay dividends.
This could indicate that either the fund manager has tremendous confidence in the prospects of the stock.
The same holds true if the portfolio is concentrated in a sector or an industry.
Coming back to the stock level, one may also check how much of the portfolio is invested in top 10 stocks, or how many stocks the fund has invested in. that also is an indication of the concentrated position the fund manager might have taken.
Portfolio concentration is an indicator of the risk the fund manager has taken based on his conviction. Invest in these schemes if you are comfortable with that risk.
-       Amit Trivedi
The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at