If you are investing in mutual funds to create wealth and achieve your financial goals – whether it is investing a lump sum or through the Systematic Investment Plan (SIP) route – how you approach them matters.
Investing in any scheme out there – on an ad hoc basis – or just because your next-door neighbour, friend, relative, etc., has bought, may not be the right approach.
A wise approach would be assessing your own needs, reading the factsheet carefully and doing research.
So, what should you look for in a mutual fund factsheet before investing your hard-earned money?
Well, here’s what you need to check:
#1 Who manages the money
Wouldn’t you like to know who will manage your hard-earned money – his/her experience, educational background, the amount of money (AUM) managed, how the schemes under his/her watch have fared, etc.?
If it is a star fund manager, there may be some advantage. But beyond a point, it is equally important to understand the investment process at the fund house.
A mutual fund scheme needs to be process-driven (with a dedicated research and fund management teams) and not just star fund manager-driven.
This is because tomorrow, if the fund manager leaves, it should not weigh down on the scheme’s performance.
Over the years, we have witnessed some of the old veterans and star fund managers, such as Prashant Jain (erstwhile with HDFC Mutual Fund), Madhusudan Kela (erstwhile with Reliance Mutual Fund), Kenneth Andrade (erstwhile with IDFC Mutual Fund), Sandip Sabharwal (erstwhile with SBI Mutual Fund and JM Financial Mutual Fund), etc., moving on.
Recently, Ms Roshi Jain exited HDFC Mutual Fund. She was managing assets worth over Rs 1.37 lakh crore across schemes, including India’s largest flexi-cap fund – the HDFC Flexi Cap Fund.
Very recently, Anish Tawakley, the co-chief investment officer for equities at ICICI Prudential Asset Management, who managed the ICICI Prudential Large Cap Fund (the largest large cap mutual fund scheme in India), ICICI Prudential Small Cap Fund, and a couple of other funds, handling a total of Rs 1.07 lakh crore worth of assets, also offered his resignation and decided to move to DSP Asset Manager as a CIO.
That’s why it’s better to entrust your money to a team, rather than a solo star.
For you, the key lies in striking a balance between the knowing fund house’s process and the fund manager’s credentials. Ideally, the fund manager’s whims and fancies shouldn’t take precedence over the process and systems when managing a fund.
#2 Expense ratio
This is the annual cost charged by a mutual fund for managing and operating a scheme, and is expressed as a percentage of its AUM.
Your focus should be on keeping the cost of investing low.
The expense ratio could vary across fund houses and for the category of scheme you are considering. If it is low, you could be at an advantage.
For example, in the case of top-rated flexi cap funds, the HDFC Flexi Cap Fund charges an expense ratio of 0.67% (under the Direct Plan), whereas the Parag Parikh Flexi Cap Fund charges 0.63% (under the Direct Plan).
| HDFC Flexi Cap Fund (Direct Plan) | Parag Parikh Flexi Cap Fund (Direct Plan) | |
| Expense Ratio | 0.67% | 0.63% |
| Amount invested (in Rs) | 1,000,000 | 1,000,000 |
| Value after 30 years (in Rs) | 25,024,550 | 25,295,693 |
| Difference (in Rs) | – | 271,143 |
For illustration purposes only.
The table above shows that even a 4-basis points (bps) low expense ratio, as in the case with Parag Parikh Flexi Fund, over a 30-year investment horizon and an assumed return of 12% CAGR, could leave you with an advantage of over Rs 2.71 lakh in terms of the corpus as against the HDFC Flexi Cap Fund. This is the impact a low expense ratio can make.
But exclusively selecting a fund because it offers a lower expense ratio is not the best approach either. You need to delve deeper.
#3 Composition of Top Holdings
You see, how a mutual fund would perform in the future could be understood from the quality of its underlying portfolio. A fund’s portfolio is unique to its investment mandate.
For example, a large cap funds portfolio is distinct from a mid-cap or a small cap fund’s portfolio. Hence, when you are comparing the factsheets of two or more schemes, make sure you are not comparing apples with oranges.
Having made the right comparison, check the total number of stocks, percentage of top 10 stocks, percentage of top 3 sectors, cash & cash equivalents, and the style of investing followed.
| HDFC Flexi Cap Fund | Parag Parikh Flexi Cap Fund | |
| No. of stocks | 51 | 90* |
| Top 10 Stocks | 49.7% | 47.5% |
| Top 3 Sectors | 63.3% | 54.6% |
| Cash & Cash Eq | 12.6% | 2.6%** |
| Fund Style | Growth-large | Blend-large[RG1] |
**If arbitrage positions and money market instruments are accounted for, cash & cash equivalents would be higher.
Portfolio data as of 31 December 2025
For example, among the top-rated flexi cap funds, as seen in the table here, the Parag Parikh Flexi Cap Fund has a larger number of stocks (including some arbitrage positions), with the top 10 stocks and top 3 sectors comprising 47.5% and 54.6%, respectively, making it far more diversified.
Moreover, the fund has taken a tactical approach to manage its portfolio, with cash calls touching 20-25% in the past. In comparison, the HDFC Flexi Cap Fund has around 12.6% in cash & cash equivalents currently (while in past, it had gone up to 15%).
In addition, the Parag Parikh Flexi Cap Fund has exposure to foreign equities (of around 14.2%), such as Alphabet (Google), Meta Platforms, Microsoft, Amazon, etc., offering geographical diversification. HDFC Flexi Cap Fund, on the other hand, is focused on domestic equities.
So, evaluating such portfolio characteristics also helps you take better investment decisions.
#4 Portfolio turnover ratio
The portfolio turnover ratio indicates how frequently the securities in the underlying portfolio are bought and sold. It helps you gauge whether the fund manager is indulging in momentum play or investing for the long term.
In other words, whether in a true sense, is a fund manager, who is predominantly supposed to ‘invest’, or is a punter.
Take, for instance, the Quant Mid Cap Fund. To clock high returns, in 2023 and 2024, its portfolio turnover was more than 300-400% — that’s akin to replacing the entire portfolio more than 3-4 times in two years. It’s only now, in 2025 and 2026 so far, that the fund has seen a significant downward shift in its portfolio turnover[RG2] (around 104-105%).
In contrast, the HDFC Mid Cap Fund has followed a strict buy-and-hold strategy. Its portfolio turnover ratio in the last three years has ranged between 10-20%, and yet it is the top-rated fund in the mid cap funds category.
What’s pivotal is that a mutual fund scheme meets its investment objective, keeping its portfolio turnover ratio well in check.
#5 Underlying portfolio valuation ratios
The portfolio valuation ratios, such as price-to-equity (PE) and price-to-book value (PB), reveal how aggressively or conservatively a mutual fund scheme is managed. It indicates how the portfolio is positioned.
Certain schemes, such as mid cap funds and small cap funds, by their very nature, would have higher PE and PB ratios compared to large cap funds and value funds.
It is necessary to keep an eye on the portfolio valuation ratios and do a like-for-like comparison.
| HDFC Flexi Cap Fund | Parag Parikh Flexi Cap Fund | |
| Portfolio PE Ratio | 21.9 | 18.8 |
| Portfolio PB Ratio | 3.1 | 3.4 |
Portfolio data as of 31 December 2025
For instance, currently among the top-rate flexi cap funds, Parag Parikh Flexi Cap Fund’s portfolio has a slightly lower PE than HDFC Flexi Cap Fund, even though their PB ratios are almost similar.
It shows that Parag Parikh Flexi Cap Fund is slightly more value-conscious. It actively seeks companies that are trading at a discount to their intrinsic value, while the HDFC Flexi Cap Fund often follows a growth at a reasonable price (GARP) strategy.
#6 Historical returns
The proof of the pudding of the mutual fund’s portfolio is in the returns. You need to evaluate long-term returns in case equity funds – 3 years, 5 years, 7 years, and so on, and not base your decision on how the scheme has fared over the short-term.
You see, the top-performing funds of one year may not necessarily be in the top quartile the next year. For example, the Quant Mid Cap fund, Quant small Cap Fund, Axis Bluechip Fund (now known as Axis Large Cap Fund), etc., which were among the investor favourites in their respective categories, today are not among the top performing funds.
Similarly, a laggard of one year may not stay a laggard in the future. For instance, HDFC Top 100 (now known as HDFC Large Cap Fund) lagged between 2016 and 2020, due to high exposure to energy and PSU stocks, which didn’t perform. But now, once again, it is among the top large-cap funds. So, at times, patience is tested.
So, remember historical returns aren’t indicative of future returns.
What you need to evaluate how the scheme has fared across market phases – bull and bear. In a bear market, the fund would fall, but it must arrest the downside risk better than the category peers and benchmark, and in a bull market, outperform. So, look for consistency in returns and not just the returns.
#7 Risk
“Successful investing is about managing risk, not avoiding it.” – Benjamin Graham (the father of value investing and Warren Bufffet’s mentor.
He also goes on to state, “The essence of investment management is the management of risks, not the management of returns.”
Buffett has aptly put, “Risk comes from not knowing what you’re doing.”
Hence, when considering mutual funds for your portfolio, don’t just evaluate the returns but also the risk-adjusted returns. Sharpe and Sortino ratios are among the popular ones to understand the risk-adjusted returns.
Sharpe ratio indicates excess returns generated for per unit of total risk, i.e. how well the investment has rewarded for total volatility. Whereas the Sortino ratio indicates the excess return generated by the investment on the downside risk, i.e. how well the investment has rewarded investors for the downside risk.
If we consider these in the case of HDFC Flexi Cap and Parag Parikh Flexi Cap, these ratios stack as follows:
| HDFC Flexi Cap Fund | Parag Parikh Flexi Cap Fund | |
| Sharpe Ratio | 1.44 | 1.68 |
| Sortino Ratio | 2.41 | 2.59 |
The Risk Measures have been calculated using calendar month returns for the last three years.
It shows that for the risk taken, Parag Parikh Flexi Cap has performed slightly better on a risk-adjusted basis.
To conclude
Reading the mutual fund factsheet before investing equips you to be a better investor.
Consider schemes that align well with your investment objectives, risk profile, the financial goal/s you plan to address, and the time to achieve those goals.
Follow a sensible asset allocation and diversify across suitable mutual fund investment schemes.
And last, but not least, set your risk-return expectations right.
Happy investing!
Note: We have relied on data from www.valueresearchonline.com, www.financialexpress.com, and the factsheets published by the respective fund houses throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Disclaimer
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing. Rounaq Neroy has over 20 years of experience in the financial markets and investments. He is a close observer of the Indian economy and writes deeply on the capital markets, mutual funds, stocks, precious metals, asset allocation, wealth management, and investment strategy. His editorials provide interesting, actionable investment ideas to guide readers in the journey of wealth creation and make wise decisions. Rounaq was the Head of Content at PersonalFN (Quantum Information Services Pvt. Ltd.), which also owns Equitymaster.com – India’s oldest and trusted equity research house.