Chapter 04 · Mutual funds and a personal plan
Reading a factsheet
A factsheet is a monthly snapshot of what the fund owns, what it costs, and how it has behaved. It is an advertisement that happens to contain the truth in tables. This chapter is a reading order that starts at the tables.
Identity, before performance
Confirm the scheme name, the plan — regular or direct — and the option, growth or income distribution. A regular plan pays a distributor out of a higher expense ratio. A direct plan does not. Comparing a regular plan’s past return with a direct plan’s, or with an index, without noticing the plan, misstates the cost you will actually pay. The growth option reinvests inside the NAV. The income-distribution option pays out, and the NAV drops by about the payout, which is not a loss of value but is a tax event you should understand before you applaud a ‘dividend’.
The cost and the size
Read the expense ratio for the exact plan you can buy. Then read the assets under management. A tiny fund can be perfectly fine and can also be wound up or merged. A very large fund in a small corner of the market can be forced to own more and more of the same liquid names, which quietly turns it into the index. Neither fact is a decision by itself. Both belong on your page of notes before the colourful bar chart of returns.
Holdings and what they imply
| Block on the factsheet | What you are looking for |
|---|---|
| Top ten holdings | Are they the same names as the benchmark’s top ten, in similar weights? If yes, you are close to an index fund. |
| Sector weights versus the benchmark | A large extra bet on one sector is the fund’s actual view. Decide whether you wanted that bet. |
| Cash and debt inside an equity fund | A little cash is plumbing. A persistent large cash pile means part of your equity allocation is not in equities, while you may be paying equity-fund costs. |
| Portfolio turnover or the implied churn | High turnover is not a sin, and it is a cost. It should be earning its keep. |
| Risk statistics, if shown | Standard deviation and beta describe the past path. They are not a promise that the next path will rhyme. |
Returns, read in the right order
Look at one-year, three-year, five-year, and since-inception figures beside the benchmark for the same periods, and prefer the longer ones. A fund that is ahead over one year and behind over five has not ‘started to work’. It has had a year. Check whether the return is for the direct plan or the regular plan, and whether it is point-to-point ending on a flattering month. If the factsheet gives calendar-year returns, use those, because a single end date can make every fund look wise or foolish together. Finally read the manager’s commentary as a claim, and underline anything you can check against the holdings. ‘We remain cautious’ next to a portfolio that is fully invested and concentrated is a sentence, not a position.
What to remember
- Confirm the plan and the option. Regular and direct do not cost the same, and a payout is not a free dividend.
- Read the expense ratio and the holdings before the performance chart.
- If the top holdings match the benchmark, question the fee.
- A large, persistent cash pile inside an equity fund is an allocation decision you did not make.
- Prefer several periods and calendar years over a single recent number.