FUND FULCRUM

 February 2013

The New Year began on an optimistic note for the Indian mutual fund industry. Month-end assets under management (AUM) increased to an all-time high of Rs 8.26 lakh crore in January 2013. Led by inflows into money market and income funds, AUM rose nearly 9% to record the highest percentage rise in the past nine months. Inflows of Rs 60,700 crore in January 2013 were the highest since April 2012 compared with outflows of Rs 40,900 crore in December 2012. Equity funds (including ELSS) saw net outflows of Rs 2690 crore in January 2013 from Rs 1718 crore in December 2012.  This is despite the fact that the BSE Sensex breached the 20,000 mark and gained 468 points in January 2013. Gilt funds continued to attract investors attention, registering net inflows of Rs 1145 crore as these funds are expected to benefit from a softening interest rate environment. Gilt funds saw net inflows of Rs 985 crore in December 2012 when the expectations of rate cut were high. Gold ETF inflows moderated in January 2013 with Rs 81 crore net inflows compared to Rs 474 crore in December 2012.

As per the latest data available with SEBI, there was a net inflow of Rs 1,20,269 crore between April and December 2012, as against total fund mobilisation of Rs 36,918 crore in the corresponding period of last fiscal 2011-12. However, there was a net outflow of over Rs 22,000 in the entire 2011-12, while a net amount of more than Rs 49,000 crore moved out of the mutual funds' kitty during 2010-11. At gross level, mutual funds mobilised over Rs 53.10 lakh crore in April-December period of 2012-13, while there were redemptions worth Rs 51.90 lakh crore as well. This resulted in a net inflow of over Rs 1.2 lakh crore. This significant level of fund mobilisation has also helped the total asset under management of mutual funds to grow to Rs 7.6 lakh crore as on December 31, 2012. 

The industry saw more than 36 lakh folios dip in equity mutual funds while debt funds added 7.31 lakh folios from April 2012 to December 2012. More than six lakh folios were closed in the equity mutual funds category in December 2012 as investors continued to book profits. From April to November 2012, more than 30 lakh folios have closed. A point to note is that 36 lakh folios does not equate to 36 lakh individual investors exiting the industry as many investors hold multiple folios across AMCs. The fall in folios can be attributed to the consolidation and redemption in the mutual fund industry.

Despite being allowed to charge extra fees in order to bring more assets from smaller towns and cities, the dependence of mutual fund houses on top cities to mop up funds, continues. According to the latest statistics issued by AMFI, the proportion of assets from the top 15 cities has risen for the third quarter in a row. During the quarter ended December 2012, as much as 87.7% of total assets came from Mumbai, Delhi, Bangalore, Kolkata, Chennai, Ahmedabad, Pune, Hyderabad, and Baroda, among other big cities. In the immediate previous quarter, the assets from these cities were 87.4% of the total pie. In the April-June 2012 quarter, the figure was 86.95%.

Piquant Parade

Nippon Life purchased 26% stake in Reliance Mutual Fund for Rs 1,450 crore and Nomura bought 35% in LIC Mutual Fund for Rs 3,080 crore. India has 44 asset management companies led by HDFC Mutual Fund with Rs 1 lakh crore of assets.

Regulatory Rigmarole

Red is the colour of danger, or even risk. Risks come in different shades, and SEBI thinks colour coding can say it all for mutual funds. The capital market regulator will shortly issue a guideline on “product labelling” with colour coding for mutual fund products to help investors assess the risk. SEBI is proposing this as an extension of its investor education agenda. The labelling may not stop mis-selling altogether, but the colour code should at least curb the marketing overdrive.

SEBI has allowed mutual funds to accept investor funds in new offers under the newly introduced Rajiv Gandhi Equity Savings Scheme (RGESS) for 30 days, as against a 15-day subscription period in other schemes. The relaxation has been made only for mutual fund schemes under RGESS, a Government initiative aimed at attracting small investors into the capital market. Besides, the time-frame for RGESS mutual funds allocating the refund money and issuance of statements by mutual fund houses would be 15 days from the closure of the initial subscription. The deadline remains at five days for other mutual fund schemes. As per the notification issued by SEBI on the RGESS, there would be a lock-in period of one year on investments made under the scheme. For transactions undertaken by investors through their RGESS designated demat account, depositories would be required to seek necessary transactional details from stock exchanges for enforcing lock-in. AMCs are prepared to pay commissions of as high as 6% to distributors for selling RGESS.

SEBI has allowed Gold ETFs to invest in gold deposit schemes (GDS) of banks. The total investment in GDS cannot exceed 20% of the total asset under management of any scheme. Before investing in GDS of banks, mutual funds shall put in place a written policy with regard to investment in GDS with due approval from the Board of the Asset Management Company and the Trustees. The policy should have provision to make it necessary for the mutual funds to obtain prior approval of their trustees for each investment proposal in GDS of any Bank. The policy should be reviewed by mutual funds, at least once a year. Gold certificates issued by banks in respect of investments made by gold ETFs in GDS can be held only in dematerialized form. Gold ETFs investing in gold deposit of schemes could result in Gold ETFs outperforming their benchmarks. The objective of Gold ETF is to track the returns of gold. Placing of gold available in the ETF as deposit with banks will result in additional returns.

AMFI has revised code of conduct for mutual fund distributors by adding some of the new regulatory norms. Fund distributors were earlier governed by AMFI Guidelines and Norms for Intermediaries (AGNI) which was drafted in 2002. Some of the areas like perpetrating fraud, providing anti-money laundering details, observing high standards of ethics and integrity have been added in the revised code of conduct. The new guidelines prevent distributors from splitting of applications to earn higher transaction charges/commissions, make it mandatory for intermediaries to keep themselves abreast with the developments relating to the mutual fund industry, take reasonable steps to ensure that the investor’s details are filled and those filled in the mutual fund application form are accurate and updated and investor’s own details, and not of any third party. Intermediaries, including the sales personnel of intermediaries engaged in sales/marketing, should obtain NISM certification and register themselves with AMFI and obtain an Employee Unique Identification Number (EUIN) from AMFI apart from AMFI Registration Number (ARN). Intermediaries should comply with the Know Your Distributor (KYD) norms issued by AMFI, co-operate with and provide support to AMCs, AMFI, competent regulatory authorities, be diligent in attesting/certifying investor documents and performing In Person Verification (IPV) of investor’s for the KYC process in accordance with the guidelines prescribed by AMFI / KYC Registration Agency (KRA) from time to time. Intermediaries satisfying the criteria specified by SEBI for due diligence exercise shall maintain the requisite documentation in respect of the “Advisory” or “Execution Only” services provided by them to the investors. Last but not the least intermediaries should not indulge in fraudulent or unfair trade practices of any kind while selling units of schemes of any mutual fund. Most of the guidelines which were a part of AGNI are still present in the new code of conduct. Distributors are required to send a self-certification form to AMFI every year attesting that they have adhered to the code of conduct.

In a relief to aspiring distributors, AMFI has done away with the 10 year experience criteria required under the new cadre of distributors for insurance agents, FD agents, national savings scheme products, PPF agents. However, the first category of distributors who are retired teachers, government officials and retired bank officers will still require 10 years of experience. AMFI has created a second category of distributors who will not require 10 years of experience. This will hopefully benefit the industry in attracting more distributors. NISM has developed a one day CPE (NISM-Series-V-B: Mutual Fund Foundation Certification Examination) for new cadre of distributors.

India’s mutual fund sector, which saw an action-packed year in 2012, expects the government to continue with its reform measures for the sector. In Budget 2013-14, fund houses want the government to address the issue of double incidence of securities transaction tax (STT). They also want it to allow state-owned companies to invest in private sector mutual funds. In addition, mutual fund pension schemes should be allowed under the New Pension Scheme. Anomalies in taxation should be removed, especially for investments in fund-of-funds schemes, bonds and fixed-income instruments. There should be uniformity of tax treatment across states for VAT on gold. There should be income tax benefits for investments in mutual funds. PSUs should be allowed to invest their surpluses in all mutual funds. Investment in pass-through certificates by mutual funds should not be subject to income tax. Infrastructure development funds should get similar tax advantage of 5% withholding tax in case of similar funds from NBFCs.

The government will come up with a modified Direct Taxes Code (DTC) Bill after incorporating the suggestions of the Standing Committee on Finance, which had suggested a slew of changes to the legislation including raising annual income tax exemption limit to up to Rs 3 lakh.

Forty-two mutual funds investing in Asia stormed into the list of the world's top 100 best performing equity funds in 2012 as regional markets from Southeast Asia rallied. The top 100 list includes 14 equity funds each from Pakistan and Thailand and nine from India, according to an analysis of data for 27,153 actively managed equity mutual funds tracked by Thomson Reuters Lipper globally. The Karachi Stock Exchange's benchmark 100 share index surged 49%, while Bangkok's benchmark SET Index finished 35.8% up last year, making them the two best performing share markets in Asia. The Asia-focused funds produced an average return of 61.5%, outperforming the top market in the region as well as the 18.6% advance in the MSCI's broadest index of Asia-Pacific shares outside Japan. Nearly 7,300 equity funds investing in Asia and tracked by Lipper returned an average of 17.9% in 2012. By comparison, non-Asian funds gained 13.3%.

NFONEST

February 2013

At a time when retail interest has been waning, the market may have got a boost with the Rajiv Gandhi Equity Savings Scheme (RGESS).

Despite the fact that Rajiv Gandhi Equity Savings Schemes dominate the February 2013 NFONEST, this month’s NFONEST offers a mixture of other funds too, which add the much-needed spice to the bland and scarce NFO offerings in the past one year.

LIC Nomura RGESS Fund

Opens: February 9, 2013

Closes: February 25, 2013

LIC Nomura Mutual Fund launched its RGESS Series 1, a close-ended equity tax advantage savings scheme for equity investors in India. Under the fund, an individual with an income of up to Rs 10 lakhs would get tax incentives for investing up to Rs 50,000. The investment objective of the fund is to generate opportunities for growth while providing income tax benefits under section 80CCG of the Income Tax Act 1961 by active management of portfolio investing predominantly in RGESS eligible equity and equity related instruments. The benchmark index for the fund is BSE 100 Index.

ICICI Prudential Capital oriented Fund III – Plan F 36M

Opens: February 12, 2013

Closes: February 21, 2013

ICICI Prudential Mutual Fund has launched a new fund namely, ICICI Prudential Capital Protection Oriented Fund III – Plan F – 36 Months Plan, a close-ended capital protection oriented fund with the duration of 1100 days from the date of allotment. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The fund will allocate 80% to 100% of assets in debt securities and money market instruments with low to medium risk profile. On the other hand, it would allocate up to 20% of assets in equity and equity related securities with medium to high risk profile. The performance of the fund will be benchmarked against CRISIL MIP Blended Index. Debt portion of the fund will be managed by Mr. Rahul Goswami and equity portion will be managed by Mr. Rajat Chandak. The investments of the scheme in ADR/GDR and other foreign securities will be handled by Mr. Atul Patel.

Indiabulls Income Fund

Opens: February 12, 2013

Closes: February 26, 2013

Indiabulls Mutual Fund has launched Indiabulls Income fund, an open-ended debt scheme that invests in government securities. The primary investment objective of the fund is to generate a steady stream of income and/or medium to long-term capital appreciation/gain through investment in fixed income securities. The fund will invest in a diversified set of fixed income securities and money market instruments with the aim of generating steady returns with a low-risk strategy. The fund will invest 50%-100% in debt instruments and securitized debt. The fund will also invest up to 50% in money market instruments. The performance of the fund will be benchmarked against CRISIL Composite Bond Fund Index. The fund will be managed by Mr. Raju Sharma.

Morgan Stanley Gilt Fund

Opens: February 14, 2013

Closes: February 21, 2013

Morgan Stanley Mutual Fund announced the launch of an open-ended gilt fund ‘Morgan Stanley Gilt Fund’. The investment objective of the fund is to generate returns primarily through investments in sovereign securities issued by the Central Government and/or a State Government or repos/reverse repos in such securities. The fund will allocate 65% to 100% of assets in securities issued by Central and State Government and Treasury bills with Sovereign risk profile and will allocate up to 35% in CBLO, Repo against Government securities with sovereign to low risk profile. The fund will be benchmarked against the I-SEC Composite Gilt Index and will be managed by Ritesh Jain, Head of Fixed Income and Lead Portfolio Manager, Fixed Income Boutique at Morgan Stanley Mutual Fund. 

DSP Blackrock RGESS Fund

Opens: February 14, 2013

Closes: February 28, 2013

DSP BlackRock Mutual Fund launched DSP BlackRock RGESS Fund Series 1 to 5, a close-ended equity scheme which will invest in eligible securities as per Rajiv Gandhi Equity Savings Scheme, 2012. The primary investment objective is to seek to generate capital appreciation, from a portfolio that is substantially constituted of equity securities, which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme  (RGESS). The fund will invest a certain portion of its corpus in cash and cash equivalent and money market instruments from time to time. The fund will allocate up to 95%-100% of assets in equity securities specified as eligible securities for RGESS with medium to high risk profile and will invest up to 5% in cash and cash equivalents and money market instruments with low to medium risk profile. BSE 100 Index is the benchmark index for the fund. The fund will be managed by Apoorva Shah and Dhawal Dalal.

IDBI RGESS Fund

Opens: February 9, 2013

Closes: March 8, 2013

IDBI Mutual Fund announced the launch of IDBI RGESS-Series I, a close-ended growth fund. The investment objective of the fund is to generate opportunities for growth while providing income tax benefits under section 80CCG of the Income Tax Act 1961 by active management of portfolio investing predominantly in RGESS eligible equity instruments.

SBI Sensex ETF Fund

Opens: February 9, 2013

Closes: March 8, 2013

SBI Mutual Fund, one of the oldest and trusted mutual fund houses in the country, announced the launch of SBI Sensex ETF scheme, a Mutual Fund Scheme eligible under Rajiv Gandhi Equity Savings Scheme 2012, which offers an opportunity to first time equity investors across the country to participate in India’s expected robust economic growth, through investments in Sensex, India’s oldest stock index in the Indian stock market. SBI Sensex ETF is SBI Mutual Fund’s first equity ETF, which would, take exposure in the defined basket of stocks in SENSEX index, in the same proportion. SBI Sensex ETF would thus passively invest in the best of Indian companies, which offer superior financial performance, better governance coupled with maximum liquidity, thereby making a comfortable start for the first time investors. SBI Sensex ETF comes with a passive investment strategy and at a significantly lower cost to invest in the equity market. The fund shall endeavour to provide returns that, before expenses, closely correspond to the returns delivered by BSE Sensex, subject to tracking error. A few unique advantages of ETFs are disclosure of portfolio on a daily / real time basis and   investors would find it easy to buy and sell at any time during market hours. From the tax benefits point of view, Investment in SBI Sensex ETF is eligible for tax benefits under RGESS 2012 (Section 80CCG of the Income tax Act) for new retail investor having gross total income less than or equal to Rs. 10 lakh. The performance of the fund will be benchmarked against BSE Sensex Index. The fund will be managed by Mr. Ravi Prakash Sharma.

UTI RGESS Fund

Opens: February 9, 2013

Closes: March 8, 2013

UTI Mutual Fund has launched a new fund namely, UTI Rajiv Gandhi Equity Saving Scheme UTI-RGESS, a close-ended passive index fund tracking S&P CNX Nifty Index with a tenure of 3 years from the date of allotment. The investment objective of the fund is to invest in stocks of companies comprising S&P CNX Nifty and endeavor to achieve return equivalent to Nifty by “passive” investment. The fund will be managed by replicating the index in the same weightage as in the S&P CNX Nifty Index with the intention of minimizing the performance difference between the fund and the S&P CNX Nifty Index in capital terms, subject to market liquidity, costs of trading, management expenses and other factors which may cause tracking error. The fund would alter the scrips/weights as and when the same are altered in the S&P CNX Nifty Index. The fund will allocate 95% to 100% of assets in equity and equity related instruments of S&P CNX Nifty. On the other hand, it would allocate up to 5% of assets in money market instruments. The fund will be managed by Mr. Kaushik Basu.

HDFC RGESS, JP Morgan Emerging Markets Opportunities Equity Offshore Fund, Baroda Pioneer Diversified Equity Fund, Birla Sun Life RGESS, ING Forward P/E Ratio Fund, and Axis Dynamic Balanced Fund are expected to be launched in the coming months.

GEMGAZE

February 2013

Lifecycle investing offers the lifeline 

Depending on the asset allocation, Fund of Funds can be compared to equity-diversified funds, balanced funds, or debt funds. The performance of FoFs is commendable compared with other funds over the long term. For example, average returns from equity-diversified funds in the past five years have been 19.92%. The Sensex delivered 19.30% returns in the period. FT India Life Stage FoF 20’s five-year returns are 19.27%; ICICI Prudential Advisor–Very Aggressive has given returns of 19.29% in the period and Birla Sun Life Asset Allocation Aggressive has returned 20.79%. Similarly, five-year average returns of balanced funds (equity-oriented) are 16.42%. Based on an investor’s age, these funds provide an option to put money in schemes with different asset allocations, which is essential to lifecycle investing. A person in his 20s can go in for an aggressive or a very aggressive fund and someone in the 50s can go in for a conservative or a very conservative fund. If an investor had to shift between funds, it would attract capital gains tax and exit load. In FoFs, there is no such liability. Moreover, when a fund manager invests, he takes into consideration the cash level and the equity-debt ratio of each fund in the portfolio. The FoF is structured in such a way that the equity-debt ratio and the cash level of individual funds should not affect the overall mandated allocations.

All the GEMs that figured in the February 2012 GEMGAZE have retained their pre-eminent position in the February 2013 GEMGAZE also.

FT India Life Stage Fund of Funds Gem

Franklin Templeton AMC offers five plans based on life stages that will suit your age profile - 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. The first four plans were launched in November 2003 and the last plan was launched in July 2004. All these are plans of a single fund that has assets of around Rs 107 crore. The AUM of each plan is Rs 10.67 crore, Rs 7.43 crore, Rs 11.83 crore, Rs 11.89 crore, and Rs 65.54 crore respectively. The top three sectors in the portfolio are finance, energy, and technology. Allocation to large caps in the various plans range from a low of 55% to a high of nearly 65%. The allocation to equity tapers from 81% in the first plan to a measly 20% in the last plan. The one-year returns of the plans are 12.45%, 11.74%, 11.56%, 10.16%, and 9.49% respectively. They have surpassed their respective category averages but for the first and last plans. While the expense ratio for all the plans is the same at 2.75%, the portfolio turnover ratio is 29.16%, 15.17%, 6.5%, 11.45%, and 16.97% respectively.

ICICI Prudential Advisor Fund   Gem

ICICI Prudential Mutual Fund offers Fund of Funds through five plans launched in November 2003: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor –Aggressive, ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious. The AUMs of Aggressive, Moderate, and Cautious Plans are Rs 7.27 crore, Rs 5.31 crore, and Rs 3.35 crore respectively. The top three sectors in the portfolio are finance, energy, and metals or FMCG. Allocation to large caps hovers around 65% in all the plans. The allocation to equity is 51%, 46%, and 14% respectively. The one-year returns of the plans are 9.45, 10.05%, and 8.62% respectively. While the expense ratio for all the plans is the same at 0.75%, the portfolio turnover ratio varies a great deal at 14%, 70%, and 137% respectively.

Birla Asset Allocation Plan   Gem

Birla Asset Allocation Plan is an open-ended fund of funds, launched in January 2004, which offers three plans – Aggressive, Moderate, and Cautious. The AUM of Aggressive, Moderate, and Cautious Plans is Rs 9.98 crore, Rs 6.49 crore, and Rs 5.16 crore respectively. The top three sectors in the portfolio are finance, construction, and engineering. Allocation to large caps hovers around 60%. The allocation to equity is 78%, 59%, and 21% respectively. The one-year returns of the plans are 6.5%, 9.6%, and 9.23% respectively. The expense ratio for all the plans is low at 0.35%.

FT India Dynamic PE Ratio Fund of Funds   Gem

FT India Dynamic PE Ratio Fund of Funds is a hybrid fund, which moves into equity and debt in an automated manner. The fund protects downside and behaves conservatively because of its mandate. In other words, the fund automatically rebalances its asset allocation. The AUM of the fund is an impressive Rs 1299 crore. The top three sectors in the portfolio are finance, energy, and technology. Allocation to large caps is high at 85%. The allocation to equity at present is 61%. The one-year return of the fund is 10.20% as against the category average of 9.85%. While the expense ratio is at 2.71%, the portfolio turnover ratio is 35.72%. The idea behind the fund is simply great. This fund is equivalent to a wise portfolio manager that has no ego, no delusion to beat the market, and certainly no love for the stocks that it owns. It simply loves one thing; to provide returns and minimize the risk that market volatility exposes investors to. The fund has a great concept. This is good for investors who do not have time to worry about asset allocation as this fund takes care of it. Even otherwise, dynamic PE fund is good for investors with medium to low risk appetite. Investors should invest in dynamic PE fund keeping longer investment horizon in mind.

FUND FLAVOUR

February 2012

Of FoFs and Multi-manager investing …

A mutual fund that invests in other funds is a fund of funds (FoFs). Conceptually it does what you do, create a portfolio of funds. The difference being, when you buy funds yourself, you buy them individually and hold and track them separately, whereas when you buy a fund of funds, you hold just one fund which in turn holds other mutual funds inside it. This type of investment is also known as multi-manager investment. An FoF can be defined as either an asset allocation FoF or a single asset class FoF. The former invests in both equity and debt schemes, while the latter does so in one of these. An equity FoF will invest in only equity schemes; a debt FoF will touch only debt schemes; a equity-plus-debt FoF will have a mix of equity and debt schemes in its portfolio and a multi-asset FoF will invest in the units of one or more gold ETFs in its portfolio in addition to equity and debt schemes. The investment pattern and style of FoFs vary for different asset management companies (AMCs). Some FoFs invest in other schemes of the same AMC, whereas others do so in mutual fund schemes floated by other fund houses.

Fledgling Indian FoF Market …

When markets are in a bearish phase, the one who loses less is called a winner. Fund of Funds, by their very design, are meant to lose less. Inspite of this, only 1% of the Indian mutual fund industry's Assets Under Management is made up of Fund of Funds. There are valid reasons for this state of affairs.

A fund of funds will not deliver performance equal to or better than the single best performing fund that it has invested in because it holds many funds in it. The return of a fund of funds will always be closer to the weighted average returns of the funds it has invested in, quite like the return of your own portfolio of funds. And by the very same logic, a FoF will not go down as much as the worst performing fund it holds inside it. For this very reason, fund of funds are known to give superior risk adjusted returns.

FoFs, until very recently, were perceived as competition by distributors. If one single FoF itself can buy, hold, sell, over-weight, under-weight the funds it invests in, then there is no question of a distributor adding value to the investor. This misplaced perception has begun changing in the last one year.

Majority of fund of funds currently available in India actually invest in funds of only their own fund house. This limits the diversification benefits an investor aims for when he himself buys mutual funds from different fund houses. Globally, several fund of funds pick the best funds from across different fund houses and put them together into one. These are called Multi Manager fund of funds. It is like putting together the best cricket players from across the world into one team. 

Investors have to bear the recurring expenses of the FoF scheme in addition to the expenses of the underlying schemes. In view of the double layering of costs, the expense ratio of an FoF is higher than that of the other funds. 

There is a danger of duplication in FoFs. Since fund of funds buy many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.

Advantages of FoFs far outweigh the disadvantages

In a nutshell, for a first time investor, FoF is a great way to start investing in mutual funds. You need not worry about how to pick, retain or change a fund. If you are a SIP investor, just a SIP of Rs 1,000 could actually give you access to 4-5 best managers in one fund of funds as against you having to shell out Rs 1,000 minimum subscription for every manager you will invest in separately by yourself.

For those who already hold too many funds and see managing them a hassle, fund of funds aid simplification and consolidation of their holdings, as long as they can find one that is similar in objectives to the funds they hold. And the good news is that options do exist. The investors who put their money in FoFs do not need to monitor the performance of different schemes constantly. It is convenient and saves them from churning their portfolios, i.e., frequently moving from equity to debt schemes, or vice versa, depending on the market outlook.

FoFs often invest in sought-after institutional funds that are beyond the reach of retail investors. This also makes investing affordable for the investors. So, if you want to invest in five equity funds and five debt funds, and the minimum investment requirement for each fund is Rs 5,000, you will need Rs 50,000 to invest in these schemes. On the other hand, in the case of an FoF, you can invest in 10 such funds with just Rs 5,000.

When an economy is experiencing a slowdown, following a fixed investment style can be detrimental to the fund's performance. For example, mid-cap funds may underperform as mid-cap stocks are usually hammered during a downturn, or a sectoral fund may give low returns because some sectors suffer due to macro-economic factors like rising interest rates or reduced consumer spending. In such a scenario, diversifying across investment styles or multiple investment portfolios can prove beneficial. This is the basic premise of a category of mutual funds known as fund of funds, or FoFs. An FoF invests in schemes of other mutual funds and aims at diversification by spreading risk across a larger universe.

Amongst the least known but significant advantages of a fund of funds is the short-term capital gains tax that you can save. If we assume that you do change some if not all the funds you hold at least once within the first 12 months of investing in them, the gains you make on them become taxable. However, when a fund of funds manager changes any fund it has invested in, there is no tax liability that accrues to you.

Now if you combine all the above benefits, it becomes easier to appreciate the rapid growth of FoFs in India recently. FoFs are now available here for single asset classes and for multiple asset classes too. Globally, fund of funds are often preferred by super HNIs for just two reasons - their superior risk adjusted returns and equally important, their convenience.

… to mature market?

There are about 40 FoF schemes in existence today being offered by the same mutual funds that offer you equity, debt and other schemes with AUM of Rs 6741 crore as on December 31, 2012. 5 Equity FoFs have returned an average of 15.3%, 18 Hybrid FoFs have earned 11.7%, 4 Debt FoFs 9.4%, and 10 Commodity FoFs 4.8% in the past one year.

  .
Ideal FoFs…

Choosing the right FoF is made relatively easy due to its small universe. Equity investors can go for equity FoFs, debt investors can choose debt FoFs, gold lovers can go in for Gold FoFs and there is even an FoF that invests in all the three asset classes of equities, debt and gold through exposure in units of equity, debt, and gold ETF schemes. An important element to keep in mind before deciding on a FoF of a mutual fund is whether its investments will be restricted to the schemes of the same mutual fund or whether it will invest in multiple mutual funds’ schemes. The ideal FoF is one that invests across the schemes of multiple mutual funds. Investors should avoid a single mutual fund-focused FoF scheme.

As far as their performance is concerned, most of the equity oriented FoFs led by the domestic equity oriented ones have delivered luring returns across time frames and have also managed their risk well (as revealed by their Standard Deviation) which has resulted in them providing appealing risk-adjusted returns (as revealed by their Sharpe Ratio). However while investing in them, you should not just get lured by the past performance they have delivered, but also delve a litter deeper to ascertain aspects like investment objective and asset allocation as mandated for investment, track record of the underlying mutual fund schemes in its portfolio, portfolio of stocks and sectors which the underlying funds have an exposure to, investment processes and systems followed by the fund manager while choosing the underlying funds. In addition, you need to assess the tax implication of investing in a FoF scheme, as this would have an impact on the post-tax returns, which you earn on your investments.

 …for your portfolio

But before you invest in a FoF, you need to check whether the investment objectives and the asset allocation followed, suit your investment objectives as well. Moreover, you need to be ready to bear the high net expense fee of a FoF. An FoF is a worthwhile investment proposition for new and small investors willing to build a portfolio of quality mutual funds but lack resource of researching and choosing the right funds and for investors who want to eliminate the cost incurred on research and advise on investment in regular mutual funds and the hassle of maintaining and tracking their investment in multiple schemes.