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Three things to look for in the annual report of a mutual fund

LiveMint logoLiveMint 14-06-2017 Lisa Pallavi Barbora

Did you know that mutual funds also need to come out with annual reports about their schemes? While some investors may think this is too much information to handle, for long-term investors these reports contain a lot of relevant scheme-related information. These are apart from the asset management company’s (AMC) annual reports. While the AMC-level reports give details about the financials, profits, revenues, capital, borrowings and so on of the company managing your mutual funds, the mutual fund-specific reports focuses on scheme-level transactions, redemptions, portfolio holdings and so on. Here are three useful bits of information you can find in the mutual fund-specific reports. 

They contain details of each scheme with a break-up of the assets across various plans like ‘dividend’, ‘growth’, ‘direct ‘and ‘regular’. Information such as large holdings in single-company securities, in excess of 5% of a scheme’s net asset value, can be accessed in a comprehensive manner in the scheme’s annual report. Moreover, you can track inter-scheme transfers and valuation policies for thinly traded securities too. 

In 2010, the Securities and Exchange Board of India (Sebi) directed AMCs to disclose their general policies around voting rights related to shares held by them across schemes. This is to be disclosed not only in the annual report but also on their websites. Along with the policy, the disclosure on actual voting rights exercised is also to be made public. It is useful to go through the data for schemes held by you to understand how involved the fund manager is with the companies in your scheme’s portfolio. As long-term shareholders, fund managers need to have a view on corporate action and whether it is beneficial for the organization or not. The voting profile can give you a sense of how actively your fund manager takes a view on important corporate decisions put to vote at annual general meetings, postal ballots and extraordinary general meetings of the investee companies. Exercising the vote can influence outcome and long-term shareholders can benefit. 

You can look at the profitability of the AMC to ascertain whether the company has sufficient reserves for long-term operations. This is especially important where investors intend to remain with a fund for 7-10 years or more. You would like to know that there is sufficient capital cover for the asset manager to sustain through periods of stress and down cycles in the market. 

The AMC’s annual report also carries details of transactions that may have happened between the AMC and specific schemes, which may not be of immediate concern to the investors but do assume importance if transactions are material in value or cause. 

Some of this information might seem too technical for the average investor to analyse. But in times of stress, access to information helps in ascertaining if you made the right choice. 

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