analysing an equity mutual fund fact sheet

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Analyzing an Equity Mutual Fund Fact

Sheet, Risk & Performance Parameters

February, 2012



Fact Sheet

• Important items in a Fact Sheet

– Manager Review and Outlook ( Macro-Economic Review, Equity market overview and outlook, Fixed Income overview and outlook)

– Fund Manager’s profile

– Scheme Details ( Investment objective, Inception date, NAV, AUM, Minimum investment amount, Loads and Expense ratio,

Redemption process)

– Performance

– Portfolio and asset Allocation

– Risk Statistics



Market Overview & Outlook

This section equips youwith the broader macro-

economic parameters and

updates with the overview

and outlook of Equity andFixed Income Market

Disclaimer: This is for illustrative purpose only and no investment decision should be made from it .There could be various sources for the above information.



How to Read a Fact Sheet

The investment objective

provides an overview of the

scheme to the prospective

investor i.e. investing for

growth, income or capital

protect ion as stated in the SID

of the respective scheme

Sector wise break down of the portfolio and gives the

percentage holding in

respective sector It gives the proportion of assets

allocated to dif ferent classes

such as debt, equity or money

market instrument stated in the

SID of the respective scheme.

Net Asset Value (NAV) is thevalue per unit at current market

prices computed as net assets

divided by units outstanding

It lists the individual stocks in which the

fund has invested its corpus. Themarket value and percentage of net

assets hold by the fund is also

mentioned.

Size of the fund

Key portfolio statistics or performance ratiosshould be used to screen and compare mutual

funds to find those are worthy of consideration for

inclusion in ones portfolio

Fund Manager profile and

experience

Ranking by rating agencies



Value of Investment of Rs 10,000

made at inception

Scheme Benchmark

NAV of scheme as of month end

Standard Benchmark

Performance & Dividend History

Disclaimer: This is for illustrative purpose only and no investment decision should be made from it. Past performance may or may not be sustained in future and should not be used as a basis for

comparison with other investments.

Period for which the performance of the

scheme is mentioned against its benchmark

and standard benchmark

Investors may note that the difference in dividend per unit for 'Individuals'

and 'Others', in the case of debt oriented Schemes, is due to differentialrate of applicable Dividend Distribution Tax (DDT)

Pursuant to payments of divid end, the NAV of the Schemes would fall

to the extent of payout, and statutory l evy, if any



Risk & Performance Parameters

• Portfolio Turnover Ratio

• Volatility measure

– Standard deviation

– Beta

– R-Square

• Sharpe Ratio



Portfolio Turnover Ratio

• Portfolio turnover is the ratio of amount of sales or purchases ( which ever is lower ) divided by the net asset of the

fund.

• E.g. Suppose the net asset value of a scheme in the last 12 months is 100 Cr. The value of the total purchase amount

is 50 Cr which is lower of sales and purchase during the same period. The Turn over ratio is 50 Cr/100 Cr = 0.50 or

50%. This indicates that fund manager has shuffled 50% of the portfolio in the last one year.

• Higher the portfolio turnover, greater the amount of sales or purchase of assets done by fund manager. It may also

indicate timing and momentum trading as strategies to generate return.

• Turnover ratio would be most relevant to analyze in case of equity and balanced fund, particularly those funds thatderive large party of their income from actively trading. It would not be relevant for equity funds, with a value based,

long term investment philosophy.



Volatili ty Measures

• Volatility is the relative rate at which the price of a security moves up and down. If the price of a stock moves up and

down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.

• Volatility is an inherent part of all securities market

• Normally fact sheet of mutual funds scheme carries the following measures

– Standard Deviation

– Beta

– R-Square

Consider Scheme A and Scheme B over the given period of time.

Scheme A is more volatile in nature than scheme B



Standard Deviation

• Standard deviation measures the fluctuation of a fund’s return around a mean

• Higher the standard deviation, riskier the security

• Standard deviation gives an idea of how volatile the earnings are.

The above example is just for illustrative purpose.



Beta

• Beta measures the sensitivity of a portfolio against its benchmark. Its is also called the sensitivity with respect to the

market movement.

• Equity funds can have beta values as 1, >1 or <1.

• Beta of 1.0 indicates that the fund NAV will move in same direction as that of benchmark index. The fund will move up

and down in tandem with the movement of the markets (as indicated by the benchmark)

• A Beta of less than 1.0 indicates that the fund NAV will be less volatile than the benchmark index.

• A Beta of more than 1.0 indicates that the investment will be more volatile than the benchmark index. It is anaggressive fund that will move up more than the benchmark, but the fall will also be steeper.

For example, if the beta of XYZ-Equity (G) fund is 1.2 - then it’s considered as 20% more volatile than the benchmark

index (beta of benchmark index being 1). If the market is expected to move up by ten per cent, the fund should move

by 12 per cent (obtained as 1.2 multiplied by 10). Similarly if the market loses ten per cent, the fund should lose 12 per

cent (obtained as 1.2 multiplied by minus 10)

Similarly, if the beta of “ABC-Equity (G)” fund as 0.70 - this means the mutual fund scheme will be less volatile than its

benchmark index.



R- Squared

• R Square is an indicator of the confidence in estimating Beta.

• While considering the beta of any fund, an investor also needs to consider ‘R-squared’ that measures the correlation

between beta and its benchmark index. The beta of a fund has to be seen in conjunction with the R-squared for better

understanding the risk of the fund.

• In other words R-Square indicated how closely the fund’s performance correlates to its benchmark.

• R-Squared value ranges between 0 to 1

• R-squared=0 indicated no correlation and R-squared=1 indicates perfect correlation.



Sharpe Ratio

• Sharpe Ratio measures the excess return that a fund has generated relative to the risk taken.

• Risk in Sharpe ratio is measured by standard deviation.

• Sharpe Ratio= (Rp-Rf)/ Standard deviation. It measures the excess return over risk free return for a unit of risk taken

( Rp : Return of the portfolio ; Rf : risk free return)

• The higher the Sharpe ratio , the better a fund’s return relative to the amount of risk taken. A mutual fund with a higher

SR is better because it implies that it has generated higher returns for every unit of risk that was taken. On the

contrary, a negative Sharpe ratio indicates that a risk-free asset would perform better than the fund being analyzed.

Consistent Performer Lower standard deviation, higher Sharpe Ratio ( Higher Ranked Fund)

Volatile Performer Higher standard deviation, Lower Sharpe Ratio ( Lower Ranked Fund)

Mutual Fund Evaluation Criteria



• The expenses incurred in managing a mutual fund scheme, which is borne by the investor.

• Those expenses include investment management and advisory fees, legal and audit fees, custodial and transfer fees,

fund administration expenses, marketing, and other costs of offering the fund .

• SEBI regulates over the maximum expenses that can be charged to the schemes.

• Assuming that an equity scheme generating 15% returns has net assets of Rs 100 crore. With the operating expense

ratio at 2.50%, the effective return would be 12.5% (i.e. 15-2.5).

Expense Ratio

Net Assets Equity Scheme

First Rs 100 Cr 2.50%

Next Rs 300 Cr 2.25%

Next rs 300 Cr 2.00%

On the balance of Assets 1.75%



Tutorial

Assuming other parameters remain same, which Scheme would you choose?

Option A- ABC Equity (G) OR Option B- XYZ equity (G)

Disclaimer: The above example is just for illustrative purpose and is not meant to represent the performance of any particular investments

Scheme Return Risk Free Return Standard Deviation

ABC Equity (G) 22% 6% 24.60%

XYX Equity (G) 20% 6% 22.10%

There are two equity schemes with similar investment objectives.



Tutorial

• Sharpe ratio of ABC= (22-6)/24.60=0.65

• Sharpe ratio of XYZ = (20-6)/22.10=0.63

Expense ratio for both the scheme is same.

Therefore the risk adjusted return is better for scheme ABC and hence choose option A.

Disclaimer: The above example is just for illustrative purpose and is not meant to represent the performance of any particular investments



Disclaimer

Statutory Details: DSP BlackRock Mutual Fund was set up as a Trust and the settlors/sponsors are DSP ADIKO Holdings Pvt. Ltd. & DSP HMK Holdings Pvt. Ltd.

(collectively) and BlackRock Inc. (Combined liability restricted to Rs. 1 lakh). Trustee: DSP BlackRock Trustee Company Pvt. Ltd. Investment Manager: DSP BlackRock

Investment Managers Pvt. Ltd. Risk Factors: Mutual funds, l ike securi t ies investments, are subject to market and other r isks and there can be no assurance thatthe Scheme’s object ives will be achieved. As with any investment in securi ties, theNAVof Units issued under theSchemes can go up or down depending on the

factors and forces affecting capital markets. Past performance of the sponsor/AMC/mutual fund does not indicate the future performance of the Schemes.

Investors in theSchemes are not being offered a guaranteed or assured rate of return. Investors in the Schemes are not being offered a guaranteed or assured rate of

return. The Schemes is required to have (i) minimum 20 investors and (ii) no single investor holding>25% of the corpus of the Schemes. In case of non-fulfillment of the

condition of minimum 20 investors, the investor’s money would be refunded, in full, immediately after the close of the New Fund Offer Period. In case of non-fulfillment with

the condition of 25% holding by a single investor on the date of allotment, the application to the extent of exposure in excess of the 25% limit would be rejected, and the

allotment would be effective only to the extent of 25% limit would be refunded/redeemed. The nam e of the Sc hem e do not in any m anner ind ic ate the qual it y o f t he

Schemes, its future prospects or returns. For Scheme specific risk factors, please refer the relevant SID. For more details, please refer the Key Information Memorandum

cum Application Forms, which are available on the website, www.dspblackrock.com, and at the ISCs/Distributors.. Please read the Scheme Information Document and

Statement of Additional Information carefully before investing.

http://www.blackrock.com/

http://www.blackrock.com/

analysing an equity mutual fund fact sheet

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