The factsheet of a mutual fund displays its investment information. But, do the investments in the factsheet, match their mandate?
The fact sheet of a mutual fund is a very important document for a prospective investor as well as an existing investor. It won’t be an exaggeration to call the fact sheet an ocean of information. Where else will an investor get information about investment objective, expense ratio, beta, standard deviation, etc, of various schemes of a mutual fund? Factsheets need to read by every investor extensively in order to get a fair idea about how investments are being made by a mutual fund. But more important than all this is that fact sheets also reveal some strange investments made by mutual funds which do not match with the investment objectives.
A Moneylife article on global funds had stated that how Fidelity International Opportunities Fund was not a truly global fund, “Fidelity International Opportunities Fund, which will soon be christened L&T Global Real Assets Fund, led the list with an annualised return of 21.21%. However, it is important to note that this scheme is not a pure global scheme. Amazingly, there are just two foreign picks in its top 10 holdings—Samsung Electronics and Origin Energy. The other top picks include HDFC Bank, HDFC and ITC. It appears more like a multi-cap, multi-country fund.”
Read more news and analysis on mutual fund by Moneylife.
Let us have a look at some other mutual fund schemes where the investment objective and actual practice of mutual fund do not match well. Here are some such examples:
Case-1: Reliance Small Cap Fund
Investment Objective: The primary investment objective of the scheme is to generate long-term capital appreciation by investing predominantly in equity and equity-related instruments of small-cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities.
Actual Practice versus Investment Objective: The scheme has investment in Infosys which is 1.64% of total investment. Whether Infosys is a small-cap or not is an open secret. On the lighter side, is the fund confident that Infosys will turn into a small-cap shortly? Similarly the scheme has invested in several mid-cap companies. There is no investment made in debt and money market by the scheme as per the fact sheet. (Source: Nov 2012 factsheet)
Case-2: Reliance Diversified Power Sector Fund
Investment Objective: The primary investment objective of the scheme is to seek to generate continuous returns by actively investing in equity and equity-related or fixed income securities of power and other associated companies
Actual Practice versus Investment Objective: The scheme has invested 5.19% of total corpus in ICICI Bank. It is not sure if ICICI Bank qualifies as associated company of power sector companies and if that is the case why only “ICICI Bank”. Investment objective and actual practice do not seem to gel well. (Source: Nov 2012 factsheet)
Case-3: ICICI Prudential Banking and Financial Services Fund
Investment Objective: Long-term investment of funds having potential for capital appreciation in banking and ï¬nancial services sector
Actual practice versus investment objective: The scheme has invested 1.5% of total corpus in Max India. Though Max India has interest in the finance business, it is predominantly into healthcare, so the actual investment and investment objective does not seem to match perfectly.
All these three cases reflect that mutual funds are not consistent with their investment objectives always. This highlights the need for an investor to go through factsheet end-to-end and decide before investing in a mutual fund. The actual practice versus investment objective is a fair reflection of how a mutual fund operates.
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(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post-graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)