Monday, February 28, 2011

February 2011

The year has begun well for the mutual fund industry as the assets under management of the industry grew by slightly more than 10% in January 2011, on the back of increased government spending and higher investments into liquid funds by banks and corporations. The AUM in January 2011 for the industry rose to Rs 6.91 lakh crore from Rs 6.26 lakh crore as at the end of December 2010. At the end of January 2010, the AUM stood at Rs 7.61 lakh crore. January 2011 has also seen net inflows of Rs 84,452 crore; a reversal of sorts for the industry that had experienced heavy net outflows to the tune of Rs 44,349 crore in December 2010. The highest net inflow was seen in the case of liquid/money market funds at Rs. 72,984 crore. Quarter-end generally sees a lot of outflows in the system due to the advance tax payment by corporations. But the money has now come back into the system and is flowing into the liquid funds. The government, which was earlier holding cash of up to Rs. 1.25 lakh crore, has also spent about Rs. 1 lakh crore, thereby, infusing further liquidity into the system. But from the retail equity point of view, this does not hold much significance as the equity portion has not seen too much growth for a while now. Equity funds saw a net inflow of Rs 881 crore. However, the 10% fall in the market in January 2011 caused shrinkage in the asset base of equity funds. At the end of January 2011, 39 fund houses had over Rs 1,65,000 crore in equity assets. Money is trickling into equity funds. We are seeing a gradual rise in the number of SIPs. Debt funds are seeing an increase in allocations because of higher yields. Though the new applications in December 2010 had gone up, January 2011 saw a drop due to poor market performance and KYC compliance issues. A total of 1005 schemes exist in the industry as at the end of January 2011.

CNBC-TV18 mutual fund of the year awards 2011 clearly belonged to HDFC that bagged the best mutual fund house of the year award, the best equity fund house of the year and the best debt fund house of the year among a host of other awards. Prashant Jain of HDFC won the award for the best equity fund manager while Maneesh Dangi of Birla Sunlife Mutual Fund walked away with the best fixed income fund manager of the year. The most investor-friendly fund house is UTI Mutual Fund. The best funds in the various categories are:

• Large-cap oriented fund: Fidelity India Growth Fund
• Equity diversified fund: Reliance Equity Opportunities Fund
• Small and midcap fund: DSP BlackRock Small & Midcap Fund
• Equity-linked savings scheme: Fidelity Tax Advantage Fund
• Balanced fund: HDFC Prudence Fund
• Income fund: Canara Robeco Income Plan
• Monthly income plan: HDFC Monthly Income Plan – LTP
• Index fund: Nifty Benchmark Ex-Traded Scheme - Nifty BeES
• Income funds—short term: IDFC Super Saver Income Fund
• Ultra short-term fund, retail: HDFC Cash Management Fund
• Liquid fund, retail: HDFC Cash Management Fund - Savings Plan
• Most innovative fund: Motilal Oswal MOSt Shares M50

Piquant Parade

The average assets managed by L&T Mutual Fund have increased by 76% on a year-on-year basis to Rs 3,955 crore at the end of January 2011. L&T Mutual Fund has completed its first year of operation since February 28, 2010, after the company was acquired by L&T Finance from Cholamandalam DBS Finance group. The total number of distributors has increased to 10,430 in February 2011, from 6,552 in the corresponding month a year ago. The company has added about 50,000 new folios during the past one year and opened 39 new branches.

The Peerless Group has shelved its plan for a foreign joint venture partner for its mutual fund venture as solo growth in the first year gives an assurance that it does not need a partner for the local market. The company’s assets under management at Rs 4,500 crore in less than a year gives it the confidence that it could be on its own in the domestic market which is at Rs 6.9 lakh crore. Principal Mutual found more than a decade ago has assets at Rs 5,642 crore and JM Mutual Fund’s AUM is at Rs 6,524 crore, according to data from the Association of Mutual Funds in India (AMFI) website.

Baroda Pioneer Mutual Fund has decided to change the face value of the units of Baroda Pioneer Treasury Advantage Fund (w.e.f. February 7, 2011) and Baroda Pioneer Liquid Fund (w.e.f. February 6, 2011) from Rs 10 to Rs 1000, consequent to which the Applicable Net Asset Value per unit (NAV) for the schemes will be based on Rs 1000.

UTI Mutual Fund announced its tie-up with HDFC Bank for its Investor Education Initiative called ``Swatantra`` in the states of Kerala, Karnataka, and Tamil Nadu. This initiative aims at creating investor awareness about different financial products and wealth creation options. Innovative formats will be used for communicating about financial products like mobile banking, web campaigns, face book, twitter, financial calculators, and planners. As part of this initiative, two UTI Knowledge caravans will travel through small towns in the states of Kerala, Karnataka, and Tamil Nadu spreading financial literacy. During their journey the caravans will cover more than 7,300 kms in about 56 days. Investor Meets will be held in approximately 130 towns and will be conducted in local languages i.e. Tamil, Malayalam, and Kannada. HDFC Bank’s huge network of rural and semi-rural branches across Kerala, Karnataka, and Tamil Nadu will interact with millions of people living in rural areas to impart financial knowledge which hitherto has been the domain of the urban rich.

Regulatory Rigmarole

Capital market watchdog Securities and Exchange Board of India (SEBI) has proposed a new reporting system for mutual funds based on XBRL (eXtensible Business Reporting Language) technology - a standardized business reporting tool that enables easy scrutiny of bulk documents without delay. SEBI has issued a draft structure of the proposed XBRL system for all the regulatory filings to be made by mutual funds. To start with, SEBI is likely to make the new business reporting mechanism mandatory for mutual funds and then expand this system to other segments in phases. XBRL Taxonomy is a classification system that can be considered as an electronic dictionary for business and financial terms. It consists of a delineation of all the business and financial concepts along with their basic accounting and XBRL properties as well as the interrelationships amongst the concepts.

The 2011-2012 Union Budget has permitted SEBI registered mutual funds to accept subscription from foreign investors, who meet KYC requirements, for equity schemes. This opens up a major new route for foreign investments to come to India, besides opening up a colossal business opportunity for Indian mutual funds, especially those with foreign promoters or foreign joint venture partners. The dividend distribution tax on debt schemes has been enhanced to 30% plus surcharge. This will eliminate the tax arbitration between debt mutual funds and alternative debt products.

Morgan Stanley has debunked mutual fund industry’s pet theory that entry load ban and the resultant lull in new fund offerings have impacted its profitability. The fund industry is gaining more stability since the SEBI ban on entry load. The Morgan Stanley report says that the SEBI entry load ban has not affected the relative position of the industry in the equity market. The mutual funds’ AUM in market cap is intact. Despite the entry loan ban in 2010, gross inflows in equity funds touched a 3-year high. Over the past three months, equity mutual funds have seen the highest cumulative inflows since August 2009. This is distinctly surprising in the context of market volatility.

Monday, February 21, 2011

February 2011

Off to a good start in 2011!

2010 saw 17 new fund offerings collect about Rs 2,600 crore, down 44% (Rs 5,900 crore) than what was collected in 2009. This also pales in comparison with the NFO collections during the peak of the bull-run between August 2007 and January 2008, when 33 schemes collected about Rs 21,770 crore. The highly volatile equity markets in 2010 as compared to an upswing in 2009 may to a great extent explain this trend. DSP BR Focus 25 fund, launched in April, made the highest collections of about Rs 700 crore. In stark contrast was ICICI Prudential Nifty Junior Index Fund, which collected just about Rs 1 crore. Interestingly, of the 40 asset management companies only 12 raised funds last year. With the market regulator advising asset management companies against launching schemes that overlapped with offerings, some of the bigger players such as HDFC, Franklin, and UTI did not launch any schemes. Seven of the 17 schemes launched were index-based.

It is raining NFOs in February 2011 … eight NFOs are currently on offer out of which four are capital protection-oriented funds.

Canara Robeco Gilt Advantage Fund
Opens: February 14, 2011
Closes: February 23, 2011

Canara Robeco Gilt Advantage Fund, an open ended gilt scheme, aims at generating returns commensurate with low credit risk by predominantly investing in the portfolio comprising of short to medium term government securities guaranteed by the central and state governments with weighted average portfolio duration not exceeding 3 years and treasury bills with low to medium risk profile. The benchmark index for the scheme will be I-Sec Si-Bex Index. The fund will be managed by Ms. Suman Prasad.

Canara Robeco Capital Protection oriented Fund
Opens: February 11, 2011
Closes: February 24, 2011

Canara Capital Protection Oriented Fund, a 3 year close-ended capital protection oriented Fund, seeks capital protection by investing in high quality fixed income securities maturing on or before the maturity of the scheme and seeks capital appreciation by investing in equity and equity related instruments. The scheme is rated AAAf (SO) by CARE. The scheme follows a passive investment strategy for the fixed income component of the scheme wherein the fund will be investing only in the highest rated fixed income securities with the objective of capital protection. The equity component of the scheme will be primarily invested in diversified equity and equity related securities of the companies that have a potential to appreciate in the long run. The asset allocation of the scheme will be 75-100% in debt and money market instruments and 0-25% in equity and equity linked instruments. The fund provides an attractive investment opportunity for risk–averse investors looking at a marginal equity exposure. This fund will try to capture the current rates of interest in the debt portion of the portfolio while the equity portion is expected to deliver returns. The benchmark index for the scheme is Crisil MIP Blended Index. The fund managers for the scheme will be Ritesh Jain and Anand Shah.

IDFC Infrastructure Fund
Opens: February 14, 2011
Closes: February 28, 2011

IDFC has launched a pure play infrastructure fund called IDFC Infra Equity Fund. The investment objective of the scheme is to generate long-term capital growth through an active diversified portfolio of predominantly (80-100%) equity and equity related instruments of companies that are participating in and benefiting from growth in Indian infrastructure and infrastructural related activities. The fund is designed to be ‘true-to-label'. It defines infrastructure using benchmark definitions of RBI and World Bank. It would allocate upto 20% of assets in debt and money market instruments with low to medium risk profile. The scheme benchmark index will be BSE 200. The fund manager for the scheme will be Mr. Kenneth Andrade.

Reliance Gold Savings Fund
Opens: February 14, 2011
Closes: February 28, 2011

Reliance Gold Savings Fund is the first gold fund of fund in the industry which opens a new avenue for investing in gold as an asset class. The fund seeks to provide returns of gold through investments in Reliance Gold Exchange Traded Fund, which in turn invests in physical gold. It offers returns of gold in a paper form without the need of a demat account. It is a passively managed fund which would enable an investor to save for gold in a convenient manner either through lump sum investment or through systematic investment. The fund will help the investors with add on facility like systematic withdrawal plan, systematic transfer plan, auto- switch, and trigger facility. It aims to give investors the opportunity to participate in the bullion market in a relatively cost effective and convenient way as you can directly purchase and sell the units at the AMC. The scheme would allocate 95% - 100% of assets in Reliance Gold Exchange Traded Fund with medium to high risk profile and up to 5% of assets in reverse repo and /or CBLO and/or short-term fixed deposits and/or schemes which invest predominantly in the money market securities or liquid schemes with low to medium risk profile. The scheme performance will be benchmarked against the price of physical gold. The fund manager for the scheme will be Hiren Chandaria.

IDBI Monthly Income Fund
Opens: February 14, 2011
Closes: February 28, 2011

IDBI Monthly Income Plan, an open-ended income scheme, aims at providing regular income along with opportunities for capital appreciation through investments in a diversified basket of debt, equity, and money market instruments. The scheme would allocate up to 80%-100% of assets in debt instruments (including floating rate debt instruments and securitized debt) and money market instruments. Investment in securitized debt will be only in investment grade rated papers and will not to exceed 25% of the net assets of the scheme. It would allocate up to 20% of assets in equity and equity related instruments only such companies, which are the constituents of either the S&P CNX Nifty Index (Nifty 50) or the CNX Nifty Junior Indices (Nifty Junior) comprising a combined universe of 100 stocks. These two indices are collectively referred to as the CNX 100 Index. The equity portfolio will be well diversified and actively managed to ensure the scheme's investment objectives are realized. The benchmark index for the scheme is Crisil MIP Blended Index. The fund managers for the scheme will be Gautam Kaul and Syed Sagheer.

Sundaram Capital Protection Oriented Fund – Series 2
Opens: February 15, 2011
Closes: February 28, 2011

Sundaram Capital Protection Oriented Fund Series 2 is a closed ended scheme with a tenure of 5 years from the date of allotment. The objective of this scheme would be to seek income and minimise risk of capital loss by investing in a portfolio of fixed income securities and a part of the assets in equity to seek capital appreciation. The scheme will allocate 70% to 100% of assets in fixed income securities including money market instruments with low to medium risk profile. It would further allocate up to 30% of assets in equity and equity related securities with high risk profile. Exposure to derivatives will be limited to 50% of the net assets. The scheme's portfolio structure has been rated as AAA (so) by CRISIL which indicates highest degree of certainty regarding payment of face value of the investment to unit-holders. The fund will be benchmarked against Crisil MIP Blended Index. The fund will be managed by Mr. Dwijendra Srivastava and Mr. S.Krishnakumar.

SBI Capital Protection Oriented Fund – Series II
Opens: February 18, 2011
Closes: March 4, 2011

The SBI Capital Protection Oriented Fund-Series II, a 5 year closed-end scheme, provides an opportunity to investors to invest in the equity market with a strategic equity exposure, blended with the protection of capital. The scheme has been rated an mfAAA (SO) by ICRA. Investment will be made in stocks listed on BSE/NSE having a market cap equal to or higher than the market cap of the least market capitalized stock of BSE 100 Index. While the equity part of the fund will be managed actively, the scheme shall follow a passive investment strategy for the fixed income component. Investments in debt securities in the scheme, viz central government securities or debt issued by AAA/P1+ or equivalent rated corporate, will be largely limited to those having maturities not exceeding the residual maturity of the scheme. The fund’s benchmark index is the BSE 100 Index. The fund managers for the scheme will be Rajeev Radhakrishnan for debt and R. Srinivasan for equity.

HDFC Debt Fund for Cancer Cure
Opens: February 18, 2011
Closes: March 4, 2011

HDFC Mutual Fund proposes to commemorate the 10th anniversary by a unique philanthropy initiative of launching HDFC Debt Fund for Cancer Cure (‘H-DFCC'), a three-year close-ended capital protection oriented income scheme, in association with the Indian Cancer Society (ICS). An investor will have a unique option of donating the dividends earned, on his investments, either partly or wholly, to ICS. The donation of dividend to ICS is eligible for tax deduction under Sec 80G of Indian Income-tax Act, 1961. Such donations will be utilised by the trust to provide financial aid for cancer treatment, nutritional supplement, accommodation and counselling. The fund will invest up to 80-100% of its corpus in debt instruments and up to 20% in government securities. The minimum investment is of Rs 1 lakh and in multiples of Rs 1,000 thereafter. The benchmark for the fund is the Crisil Short Term Bond Fund. The fund will be managed by Mr Anil Bamboli, who manages other debt funds such as HDFC Multiple Yield Fund and HDFC High Interest Fund.

H-DFCC stands out for a few special features. One, the fund doubles up as an investment vehicle and also helps contribute to charity. Two, donation of the dividend declared by the fund is eligible for deduction under Section 80G of the Income Tax Act. And thirdly, as the objective is partly charitable in nature, no investment management and advisory fee would be levied by HDFC AMC, although there would be some recurring expenses incurred to run the fund.

Birla Sunlife Interval Income Fund, BNP Paribas Capital Protection-oriented Fund, Daiwa Gilt Fund, ICICI Prudential Lakshya Fund, and IDFC Quarterly Interval Funds are expected to be launched in the coming months.

Monday, February 14, 2011


February 2011

A single-stop solution…

Fund of Funds are a good option for investors looking for expert handholding to invest based on asset allocation. Most of the funds are built around risk profiles – conservative, moderate and aggressive — in which most of the retail investors fit in. It is the risk profile of the investor and the life stage that the investor is in that will decide which of these options he or she should choose. This makes the investment process much easier for investors and the inbuilt rebalancing feature helps in maintaining the target asset allocation, which could go awry due to market. The best part of investing in an asset allocation fund is that you will get access to a basket of funds with different investment styles that will invest according to your asset allocation plan. It saves the time needed for investing in multiple schemes and tracking them. A life stage fund can provide investors a single-stop solution for their needs.

All the four FoFs that found a place in the 2010 GEM GAZE have retained their GEM status in 2011.

FT India Life stage Fund of Funds Gem

Simplifying life in stages

To make life simpler, Franklin Templeton AMC has plans based on life stages, which help investors to decide on a plan that will suit his age profile. These include FT India Life Stage FoF 20s, FT India Life Stage FoF 30s, FT India Life Stage FoF 40s, FT India Life Stage FoF 50s Plus, and FT India Life Stage FoF 50s Floating Rate. All these are plans of a single fund that has assets of around Rs 230 crore. The AUM of each plan is Rs 13.92 crore, Rs 8.2 crore, Rs 13.77 crore, Rs 19.51 crore, and Rs 167.82 crore respectively. The top three sectors in the portfolio are finance, energy, and engineering, with engineering being replaced by metals in the case of the last two plans. Allocation to large caps in the various plans range from a low of 65% to a high of nearly 80%. The allocation to equity tapers from 82% in the first plan to a measly 20% in the last plan. The one-year returns of the plans are 10.72%, 9.46%, 8.36%, 6.9, and 6.36% respectively. They have all surpassed their respective category averages. While the expense ratio for all the plans is the same at 0.75%, the portfolio turnover ratio is 8.01%, 8.56%, 6.24%, 15.43%, and 22.5% respectively.

ICICI Prudential Advisor Series Gem

Priced possession

ICICI Prudential Mutual Fund offers FoF through five plans: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor –Aggressive, ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious. Based on an investor’s age, these funds provide an option to put money in schemes with different asset allocations, which is essential for life-cycle investing. A person in his 20s can go for an aggressive or a very aggressive fund and someone in the 50s can go for a conservative or a very conservative fund. However, the funds do not offer automatic switching between plans. Switching is treated as redemption and has tax implications. The choice rests with the customer. The asset allocation pattern, benchmark indices, and the exit load structure have undergone a complete overhaul since April 2010. The AUM of Aggressive, Moderate, and Cautious Plans is Rs 7.6 crore, Rs 6.28 crore, and Rs 3.21 crore respectively. The top three sectors in the portfolio are finance, energy, and metals, with metals being replaced by technology in the case of the last two plans. Allocation to large caps hovers around 70% in all the plans. The allocation to equity is 47%, 37%, and 17% respectively. The one-year returns of the plans are 10.42%, 7.01%, and 6.06% respectively. They have all surpassed their respective category averages. While the expense ratio for all the plans is the same at 0.75%, the portfolio turnover ratio is very high at 296%, 340%, and 381% respectively.

Birla Asset Allocation Plan Gem

In search of value

Birla Asset Allocation Plan offers three plans – Aggressive, Moderate, and Cautious Plans. The AUM of Aggressive, Moderate, and Cautious Plans is Rs 15.41crore, Rs 13.5 crore, and Rs 10.47 crore respectively. The top three sectors in the portfolio are finance, and technology with healthcare and energy being the other two prominent sectors. Allocation to large caps hovers around 50%. The allocation to equity is 71%, 48%, and 18% respectively. The one-year returns of the plans are 7.4%, 6.44%, and 5.69% respectively. All but the Aggressive Plan have surpassed their respective category averages. The expense ratio for all the plans is low at 0.35%.

FT India Dynamic PE Ratio Fund of Funds Gem

Dynamic defence

The AUM of the fund is an impressive Rs 1308.3 crore. The top three sectors in the portfolio are energy, finance, and engineering. Allocation to large caps is high at 88%. The allocation to equity at present is moderate at 41%. More than being a FoF, the fund is more of an asset allocation fund. It switches between equity and debt depending on Nifty’s price-earnings (P-E) multiple. Higher the Nifty’s P-E, lower is its allocation to equity and vice-versa. Such deliberated asset moves have helped the fund contain downsides better than pure-play equity funds and deliver better than debt funds during protracted rallies. The fund's performance during periods of market correction merits special attention. In the bear market of 2008, its NAV fell by just about 26%, against the 56% decline averaged by diversified equity funds. The one-year return of the fund is 8.27% as against the category average of 6.76%. While the expense ratio is at 0.75%, the portfolio turnover ratio is 41.97%.

Monday, February 07, 2011

February 2011

Hit the bull in the eye…

Mutual fund investments have gained a lot of popularity in the last two decades, primarily by virtue of their ability to reduce risks, provide greater diversification and beat market volatility to a certain extent. But with a plethora of schemes available in the market, how do you choose the right one or diversify among the different schemes? The answer could well be 'fund of funds'.

…with Fund of Funds

In simple words, a fund of funds is a mutual fund which invests in other mutual fund schemes. Where a traditional mutual fund comprises of a portfolio of shares, a fund of funds comprises of a portfolio of different mutual fund schemes. The process of investing in fund of funds is similar to investing in other mutual funds. For the amount invested, units are allocated on the basis of the NAV of the scheme. The performance of the FoF is linked to the NAV movement of the underlying mutual fund schemes, in which the FoF has invested. Fund of funds invest in mutual funds on the basis of an investment objective, such as aggressive, conservative etc. The right funds to invest in are chosen by the fund manager.

Weighing the scales…

Does it make sense to invest in FoFs? Let us look at the various issues associated with FoFs.


Just as a mutual fund scheme offers diversification by investing in various equity scrips, a FoF offers diversification by investing in various mutual fund schemes. Experience of the past few years, shows that the top performers are usually different from year to year. However, there are certain funds, which have been consistent performers. Therefore, a FoF that invests in say 4-5 of the top ten funds today is expected to yield better returns than say investing in the top performing fund of the day. Secondly, you get a chance to diversify across various fund managers and investing styles. Thirdly, even if a fund manager quits one AMC and joins another whose fund you already own in the FoF, you are not affected by this constant movement of the fund managers.


As a prudent investor, you would like to diversify your investment across both equity and debt funds. By choosing a suitable FoF, you get a chance to invest across different class of funds with just one investment. Thus, it becomes very convenient for investing and monitoring. You need not keep track of multiple mutual fund schemes and their performances. You would have only one folio to maintain and one NAV to keep track of. Moreover, suppose you wanted to invest in 2 equity funds and 2 debt funds, assuming each fund has a minimum stipulated investment of Rs 5,000, you would need Rs 20,000. In a FoF, Rs 5,000 would suffice.


This is a double deal that a FoF offers. Suppose you have Rs 100 to invest and your debt-equity allocation is 30:70. After one year the Rs 30 in debt has grown to say Rs 32.40 @8% p.a. and the Rs 70 in equity to Rs 94.50 @35% p.a. The debt-equity allocation has now become 25.5:74.5. Thus the portfolio has become riskier than your profile of 30:70. Therefore, you need to sell Rs 5.67 of equity and invest in debt to bring back the debt-equity ratio to 30:70. Conversely, say after one year the debt has grown to Rs 32.40 @8% p.a., but equity portion suffered a loss of 20% and reduced to Rs 56. The debt-equity ratio changed to 36.7:63.3. Now you need to sell Rs 5.88 from debt and put into equity. This rebalancing will involve capital gains tax, if you do it by holding individual mutual funds. When a FoF does it, there is no long/short term capital gains tax, which can be as high as 30% on short-term capital gains in a debt-fund. This is a big benefit. The second benefit that FoF rebalancing offers is a psychological one. Usually people do not sell when the markets are rising and do not buy when the markets are falling. Yet, this is exactly what you should be doing. FoF does it automatically (and it usually can be in your long term interest).

Cascading costs cornered

Market regulator the Securities and Exchange Board of India (SEBI) has restrained fund houses from following a two-level fee pattern while launching FoFs. The regulator has capped total expenses for launching a FoF at 2.5%, which will include fund management fees not exceeding 0.75% and charges levied by target or master fund (the recipient fund). The regulation will restrain fund houses from entering into revenue-sharing arrangements with their fund management partner, as was the case in FoFs. Fund houses used to charge investors at two levels — one while investing in the source fund (or feeder fund), and for a second time when the source fund invests in a target fund. By restricting revenue sharing, the regulator intends to stop charging asset management charges at two points. If one details the cost structure of FoFs, fund houses pays for marketing expenses, registrar fee and distributor commission from the 75-bp commission charged from investors. The partnering fund management company (the master fund managers) allows the source fund (FoF) 75 bps from the fund corpus as ‘marketing charges’ or ‘fund allocation charges’. The target fund, in turn, levies asset management charges between 1.5% and 2.5% (1.5% being in the case of investments into institutional class (I-share class) funds and 2.5% in the case of investments in A-share class (or retail class). This takes the overall intermediary expense on the fund to about 3.25%, which will have to be borne by the investor. In the case of domestic funds, AMCs levied fund management charges of up to 75 bps (each) on both feeder and master funds. With the cap on asset management fees in place, domestic funds will not be able to receive fund management charges on both feeder fund and master fund levels.


As per the present tax laws, equity FoF does not enjoy the benefits available to a normal equity fund. Therefore, if you invested in an equity FoF you would be liable to pay dividend distribution tax (DDT) of 14.03% and LTCG tax of 10% (without indexation), which is otherwise NIL for a normal equity mutual fund. This higher tax can significantly reduce the post-tax returns. Once Direct Taxes Code is implemented from April 1, 2012 there will be DDT of 5% for equity mutual funds and STCG rates will be charged in the place of LTCG rates. DTC has linked the short-term capital gains tax to your annual income (taxed at half the normal slab rates).

Single AMC FoFs
Most FoFs were, till recently, not true FoFs. They invested only in the different funds of the same AMC, which promoted the FoF. Only recently, some FoFs have been launched which invest across different AMCs and hence are truly diversified.

The Roller Coaster ride

The first FOF was launched by Franklin Templeton Mutual Fund on October 17, 2003. Fund houses like DSP Blackrock, ICICI Prudential, Birla Sunlife, Franklin Templeton, and Fidelity have 21 FoF schemes with AUM of Rs 3010 crore as of December 31, 2010, according to AMFI data. This is a seven-fold increase from a mere 3 schemes in 2003. But FoFs in India have traversed a chequered path with the number of FoF schemes and the AUM following a wave-like pattern.

The awakening?

Due to their collective nature, fund of funds type of investments experience a wide range of diversity. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g.Aggressive/ Cautious FOFs etc. Increase in diversity translates to relatively low risk as well as high rates of returns from the various securities. The primary objective of FoF is to provide greater diversification, at reduced risks and ease the process of fund selection for investors. New or first time investors, who do not have large capital for a diversified portfolio, could now diversify from among thousands of funds and stocks, with a small amount of money. Thus, if you lack the time, inclination, and expertise to monitor the market or mutual funds and are unable to take informed decisions, fund of funds could be the ideal choice for you.