FUND FULCRUM

February 2018

2018 started with positive news for the mutual fund industry. The AAUM (average assets under management) of the mutual fund industry is at an all-time high. The latest AMFI data shows that AAUM of the mutual fund industry crossed Rs.23 lakh crore to reach Rs.23.25 lakh crore in January 2018. It increased by 2.8%, or Rs.64,000 crore, from Rs.22.61 lakh crore in December 2017. In the last five and half years, the AUM has increased three and half times, from Rs.5.87 lakh crore as on March 2012 to Rs.22.41 lakh crore as on January 2018. The data shows that in a span of three and half years, the AUM has increased more than two times, from Rs.10 lakh crore in May 2014. Institutional inflows, SIP inflows from retail investors and mark-to-market gains have resulted in the growth of AUM in the mutual fund industry. Typically, in the first month of every quarter, we see strong inflows in liquid funds after redemption in the previous quarter. In addition, short-term rates are going up; hence, it has become more attractive for institutions to park their excess funds in liquid and ultra-short-term funds.

AMFI data shows that equity AUM, including pure equity funds, balanced, ELSS and equity ETFs, of the industry touched a record high at Rs.10.35 lakh crore in January 2018. Equity AUM increased by 2.61% or Rs.27,000 crore in a month. AMFI data also shows that despite the record AUM, inflows in equity in January 2018 have declined compared to December 2017. Equity funds, including pure equity funds, balanced, ELSS and equity ETFs, received inflows of Rs.20,821 crore in January 2018 compared to net inflows of Rs.24,239 crore in December 2017. This can be attributed to the cautionary approach of investors ahead of the Union Budget 2018. Many investors who invest in equity through lump sum were in a wait-and-watch mode last month due to Budget 2018. Except ELSS, all equity funds have witnessed a marginal decline in inflows in January 2018 compared to December 2017. Pure equity funds received the highest net inflows of Rs.13,404 crore among the equity funds. The AUM of these funds was Rs.7 lakh crore in January 2018. Balanced funds, which saw continuous upsurge in its inflows in 2017, have seen decline in inflows. The category witnessed inflows of Rs.7,700 crore in January 2018 as against Rs.9,800 crore in December 2017. Barring income funds, gold ETFs, gilt funds and FOFs investing overseas, all other categories witnessed inflows. Overall, the industry witnessed inflows to the tune of Rs.1.06 lakh crore while the total AUM for the month of January 2018 stood at Rs.22.41 lakh crore.

SEBI’s latest data shows that the mutual fund industry has added a record 18.31 lakh new equity folios in January 2018. Equity folios include pure equity funds, ELSS, balanced funds and ETFs. A rough calculation indicates that the industry has added an average of 61,000 equity folios per day in the month of January. Thanks to the strong rally in the equity markets, the total equity folio count went up to 5.72 crore in January 2018. In the equity funds category, pure equity funds have added over 12.84 lakh folios last month and the total number of pure equity folios stood at 4.11 crore. The shift to large-cap funds from mid- and small-cap funds can be the key reason for this increase in equity folios. ELSS followed pure equity funds. The category added over 3.11 lakh folios in January. The total ELSS folios in January were 97.60 lakh. Demand for ELSS funds remained strong due to the tax season. The balanced funds category which had witnessed significant traction in 2017, continued with its growth run. In percentage terms, the category witnessed the highest increase in folios. Folios under the category increased by 4.70% to 55.66 lakh folios in January. On the other hand, equity ETF folios decreased for the second consecutive month by 1.86% to 7.47 lakh folios. Though the folios have increased, AMFI data also shows that inflows in equity funds in January 2018 have declined compared to December 2017. Equity funds received inflows of Rs.20,821 crore in January 2018 compared to net inflows of Rs.24,239 crore in December 2017. Overall, the industry added 18.45 lakh folios in January 2018 while the total industry folio count was at 6.83 crore. The mutual fund industry has close to 1.54 crore unique investors.

Piquant Parade

A stock broking and mutual fund distribution firm, Quant Capital, is likely to foray into asset management business soon with the acquisition of Escorts Mutual Fund. AMFI data shows that Quant capital had assets under advisory of Rs.520 crore as on March 2017. Of 245 crore total AUM of Escorts Mutual Fund as on Dec 2017, the fund house manages Rs 43-44 crore in equity schemes, which is about 18% of its total assets under management. Typically, the fund house is valued based on the assets in its equity schemes. In the last one year, the AUM of Escorts Mutual Fund had plunged 14%. India’s mutual fund industry has already seen a slew of deals, including Prudential Financial Inc’s purchase of Deutsche Asset Management’s India unit, Edelweiss Asset Management acquiring JP Morgan Asset Management’s India unit and Essel Finance acquiring stake in Peerless Mutual Fund in 2016. The fortunes of India’s asset management sector have revived since 2014, when stock markets started a powerful rally, ending years of scant retail interest in mutual funds. Domestic mutual funds have seen net inflows of a record Rs 1.3 lakh crore in equity mutual funds in 2017 in the last calendar year. This the first time a mutual fund distribution and a brokerage firm will be venturing into the asset management business.

Mirae Asset Mutual Fund has joined MF Utility to expand its digital footprint. All financial and non-financial transactions pertaining to their schemes can also be submitted through MFU either electronically or physically through the authorized Points of Service (“POS”) of MFU from February 19, 2018. With the addition of Mirae Asset Mutual Fund, the AUM of the funds participating in MF Utility is over 96% of the industry AUM. The AUM of the CAN Holders as on January 31, 2018 is over Rs.92,000 crore, which has doubled in the last 10 months. On an average close to 1,000 account opening (CAN) requests are being received every day of which about 40% are electronic. Over Rs.3.50 lakh crore of MF transactions are being put through MFU every month. Mirae Asset Mutual Fund manages AUM of Rs.15,000 crore as on January 2018.

Regulatory Rigmarole

Existing independent trustees and independent directors, who have held office for nine years or more, can continue for two more years. This means, trustees and independent directors of AMCs can hold their positions for 11 years. Earlier in November 2017, the market regulator had said that existing independent trustees and independent directors, who have been with AMCs for nine years or more, could continue for one more year. Another key change in the corporate governance structure is compliance for auditors. SEBI said that auditors who have conducted audits of the mutual fund for nine years or above can continue until the end of FY2018-19. This replaces the part of the circular, which said that auditors who have conducted audit of the mutual fund for nine years or more can continue for a maximum of one year from date of issuance of the circular.

The Prime Minister gave approval to ban Ponzi schemes or unregulated deposit schemes to protect the savings of investors. The Bill contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. The principle is that the bill would ban unregulated deposit taking activities altogether, by making them an offence ex-ante, rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags. Ponzi schemes and unregulated deposit schemes have duped investors on the pretext of making them rich. Most of these schemes follow multi-level-marketing approach, i.e., creating a community of people who come together to invest in a scheme with no pre-defined objective. Many people, especially from small cities and towns, fall prey to such schemes.

SEBI has barred close ended funds from charging an additional 20 bps TER in lieu of exit loads. In a circular, SEBI said, “It is clarified that mutual fund schemes including close ended schemes, wherein exit load is not levied / not applicable, the AMCs shall not be eligible to charge the above-mentioned additional expenses for such schemes. Further, existing Mutual Fund schemes  including close ended schemes, wherein exit  load is  not  levied  /  not  applicable,  shall  discontinue,  with  immediate  effect, the levy of above mentioned additional expenses, if any.” SEBI had allowed fund houses to charge an additional TER to the extent of 20 bps with effect from October 2012 in lieu of exit loads. Also, the market regulator had mandated that the entire exit load should be credited back to the schemes. Generally, close ended funds have a lock in period of three years to five years and have no exit load period. While the industry manages Rs.32,000 crore in close ended equity funds, Rs.1.19 lakh crore was in close ended debt funds as on December 2017. A rough calculation shows that the industry is charging close to Rs.64 crore in close end equity funds and Rs.238 crore in close end debt funds in lieu of exit loads. Earlier, in December 2015, SEBI had barred new tax saving schemes from charging such an additional fee. Currently, most closed end schemes are charging an additional 20bps. In fact, a few no-load schemes are also charging this additional expense from investors. The move will reduce cost of ELSS and close end equity funds.

SEBI reclassifies cities for additional TER. Fund houses can charge additional TER only for B30 cities instead of B15. Now T15 and B15 have become T30 and B30. SEBI has revised the definition of top cities and beyond top cities for additional TER. This means, fund houses can charge an additional TER of up to 30 basis points if the net inflows from beyond top 30 (B30) cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. In a circular, SEBI said, “The additional TER for inflows from beyond top 15 cities (B15 cities) was allowed with an objective to increase penetration of mutual funds in B15 cities. Since more than five years have elapsed and on review, it is now decided that the additional TER of up to 30 basis points would be allowed for inflows from beyond top 30 cities instead of beyond top 15 cities.” With this, the additional incentive will no longer be payable to distributors in top cities ranked 16 to 30. This will come into effect from April 1, 2018.

SEBI has asked fund houses to disclose total expense ratio (TER) of each scheme on a daily basis. With this, fund houses will have to introduce a separate tab called ‘Total Expense Ratio of Mutual Fund Schemes’ on their website in a downloadable spreadsheet. In a circular, SEBI said that they have observed frequent changes in TER in mutual fund schemes and such changes are not prominently disclosed to investors. “In order to bring uniformity in disclosure of actual TER charged to mutual funds and to enable the investor to take informed decisions, AMCs shall prominently disclose on a daily basis, the TER of all schemes under a separate head on their website in a downloadable spreadsheet,” said SEBI. Fund houses will now have to intimate investors by sharing a notice through email or SMS at least three working days prior to making any revision in TER of the scheme. In addition, fund houses are required to put such a notice of change in base TER on their website prominently. So far, fund houses have been disclosing change in TER on their website within two working days of making such changes. Fund houses will have to inform the board of directors of the AMC about the revision in TER along with the rationale for their decision. The circular has come into effect immediately for new schemes and from March 1, 2018 for existing schemes. Another key development is the change in the format of TER disclosure on a scheme information document (SID).

Mutual fund houses will now have to pay a Dividend Distribution Tax (DDT) of 10% on dividends declared under equity schemes. This will make dividend payout and capital gains equitable in terms of tax for equity funds. Currently, mutual funds already pay DDT of 28.84% on dividends declared under debt schemes, while there is no DDT on equity-oriented mutual fund schemes, i.e., mutual fund schemes that invest at least 65% of its assets in equities. This move may prompt mutual fund houses to promote growth option of equity mutual funds over dividend option offered by equity schemes to defer the tax liability. The proposal may hit balanced funds, as many senior citizens used to park their money under the dividend option so as to get regular income.

Long-term (over one year) capital gains on equities are to be taxed at 10% on gains of over Rs 1 lakh on investments without the benefit of indexation. The gains will be calculated on the difference of price between 31st January 2018 and the day on which it is sold. The LTCG tax on debt funds is 20% with inflation indexation benefit. Say a debt fund generates 8% returns and the inflation is 5%. The tax will come to about 20% on 3% or 0.6%. This comes to slightly less than 10% of the returns. In short, taxation ceases to be the critical factor in selecting asset classes now. Short-term (less than one year) capital-gains tax remains unchanged at 15%. The new LTCG tax has been introduced with grand-fathering of gains till January 31, 2018, which minimises any potential short term disruptions. While the tax is a negative for the markets, the fact that equity instruments still attract the lowest rate of tax means that the asset class will continue to see good flows. There, however, may be some knee jerk reaction in the short term. Given that there is a tax even on LTCG, it would be best to keep portfolio churn to the minimum whether in debt investments, debt mutual funds, direct equities or in equity mutual funds. Purely tax-driven products like dividend plans of balanced funds, arbitrage funds, etc., may fade away.

India is poised to be the fourth wealthiest country in the world with total wealth of $24,691 billion by 2027, says a report released by New World Wealth. The report states that India will be the fastest growing among top 10 countries, growing at a massive rate of 200% in 10 years. Currently, India is the sixth wealthiest country with a total wealth of $8,230 billion. Strong growth in financial services, IT, business process outsourcing, real estate, healthcare and media sectors will pave the way for India’s growth. A large number of entrepreneurs, good educational system and the widespread use of English will also boost India’s wealth. In the last 10 years, India was the second fastest growing economy among the top 10 countries, with a growth rate of 160% between 2007 and 2017. India is also the best performing wealth market in the past one year at 25% on the back of strong stock market gains. Total wealth refers to the private wealth held by all the individuals living in each country/city. It includes all their assets (property, cash, equities, business interests) less any liabilities. The report has excluded government funds. The other countries that will witness rapid increase in wealth are China (180%) and Australia (70%). It also mentions some of the major risks that these top 10 countries may face in the future. It includes rising pension obligations, religious tensions and public healthcare costs. New World Wealth is a global market research group, based in Johannesburg, South Africa. They specialise in ratings, surveys, country reports and wealth statistics.

NFONEST

February 2018

NFOs of various hues adorn the February 2018 NFONEST.

SBI Debt Fund – Series C - 10

Opens: February 15, 2018

Closes: February 20, 2018

SBI Mutual Fund has launched the SBI Debt Fund – Series C – 10, a closed end fund that matures after 1150 days. The fund endeavours to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU & Corporate Bonds and Money Market Instruments maturing on or before the maturity of the scheme. The product is suitable for investors who are seeking regular income over long term by investing in debt/money market instrument/Govt. securities. The fund is benchmarked against the CRISIL Composite Bond Fund Index. The Fund Manager is Ms. Ranjana Gupta.

Canara Robeco Capital Protection Oriented Fund – Series 9

Opens: February 9, 2018

Closes: February 23, 2018

Canara Robeco Mutual Fund has launched a closed end fund, the Canara Robeco Capital Protection Oriented Fund – Series 9. The fund seeks capital protection by investing in high quality fixed income securities (70% to 100%) maturing on or before the maturity of the scheme of 1134 days and seeking capital appreciation by investing in equity and equity related instruments (0%to 30%). The fund is benchmarked against the CRISIL MIP Blended Index. The fund managers are Shridatta Bhandwaldar & Suman Prasad.

DSP Blackrock A.C.E Fund Series 2

Opens: February 16, 2018

Closes: March 1, 2018

DSP BlackRock Mutual Fund launched DSP BlackRock A.C.E (Analysts’ Conviction Equalized) Fund - Series 2, a close-ended multi cap fund portfolio that consists of 45-55 high conviction ideas, picked across sectors and market capitalisation. The scheme avoids sector and stock allocation bias. It will do so by having sectoral allocation in line with the NIFTY 500 and equal weights for all stocks within a sector. Stock weights will be re-balanced quarterly and stock inclusions/exclusions will be done on a real-time basis. The new scheme is probably India’s first fund to combine three big ideas such as analysts’ conviction, equal weights and smart protection. The fund is benchmarked against the Nifty 500 Index. The fund will be managed by M Suryanarayan.

Axis Capital Builder Fund – Series 1

Opens: February 16, 2018

Closes: March 1, 2018

Axis Capital Builder Fund – Series I is a close ended scheme investing across large cap, mid cap and small cap stocks maturing after 1540 days from the date of allotment. The investment objective of the scheme is to generate income and long term capital appreciation by investing in a diversified portfolio of equity and equity related instruments across market capitalisation. The product is suitable for investors who are seeking income and capital appreciation by investing primarily in debt and money market instruments for regular returns and equity and equity related instruments for capital appreciation. The fund is benchmarked against the Nifty 500 Index. The fund managers are Mr. Anupam Tiwari and Mr. Ashish Naik.

Sundaram Emerging Small Cap Fund – Series I

Opens: February 19, 2018

Closes: March 5, 2018

Sundaram Mutual Fund has launched Sundaram Small Cap Fund – Series I. The investment objective is to seek capital appreciation by investing predominantly in equity/equity-related instruments of companies that can be termed as Small Caps. Small Cap Stocks are defined as 251st company onwards in terms of full market capitalization. The fund is benchmarked against the S&P BSE Small Cap Index. The Fund Managers are Mr. S. Krishna Kumar and Dwijendra Srivastava..

SBI Debt Fund Series C- 11 to 14, Parag Parikh Liquid Fund, SBI – ETF Sensex Next 50, Mahindra Rural Bharat Yojana, Shriram Multicap Fund, SBI Equity Opportunities Fund – Series X to XI, SBI Dual Advantage Fund – Series XXVIII to XXX and Tata Arbitrage Fund are expected to be launched in the coming months.

GEMGAZE

February 2018

All the GEMs from the 2017 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2018 GEMGAZE too. 

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 72 crore. The AUM of each plan is Rs 14 crore, Rs 7 crore, Rs 14 crore, Rs7  crore, and Rs 30 crore respectively. The top three sectors in the portfolio are finance, energy, and automobile. The allocation to equity tapers from 80% in the first plan to a measly 20% in the last plan. The one-year returns of the plans are 15.27%, 12.08%, 9.94%, 9.09%, and 8.42% respectively, while the expense ratio for the plans is 1.17%, 1.81%, 2.03%, 2.05%, and 0.79% respectively. The benchmark indices are S&P BSE Sensex (65) CRISIL Composite Bond (20) Nifty (15), S&P BSE Sensex (45) CRISIL Composite Bond (45) Nifty (10), CRISIL Composite Bond (65) S&P BSE Sensex (25) Nifty (10), CRISIL Composite Bond (80) S&P BSE Sensex (20) and CRISIL Liquid (80) S&P BSE Sensex (20) respectively. The fund managers are Anand Radhakrishnan, Pallab Roy and Sachin-Padwal Desai since January 2013.

ICICI Prudential Advisor Series – Dynamic Accrual Plan Gem

ICICI Prudential Advisor Series – Dynamic Accrual Plan was launched in December 2003 as ICICI Prudential Advisor–Very Cautious as part of a five-plan Fund of Funds series: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor–Aggressive (ICICI Prudential Advisor Series – Long Term Savings Plan w.e.f. December 6, 2013), ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious (ICICI Prudential Advisor Series – Dynamic Accrual Plan w.e.f. June 17, 2015). The AUM of the Dynamic Accrual Plan is Rs 288 crores. The scheme aims to provide reasonable returns, commensurate with low risk while providing a high level of liquidity, through investments made primarily in the schemes of Prudential ICICI Mutual Fund having asset allocation to money market and debt securities. The top two holdings are ICICI Prudential Savings Fund and ICICI Prudential Short-term Fund. The one-year return of the plan is 6.9% as against the category average of 5.34%. The expense ratio of the fund is 0.94%. The fund is benchmarked against the CRISIL Composite Bond (70) and CRISIL Liquid (30). The fund has been managed by Mr. Manish Banthia since June 2017.

Birla Sunlife Active Debt Multi-manager FoF Scheme Gem

Birla Sunlife Active Debt Multi-manager FoF Scheme, which sports an AUM of Rs.74 crores, is an open-ended fund of funds launched in December 2006. The scheme seeks to generate returns from a portfolio of pure debt-oriented funds accessed through the diverse investment styles of underlying schemes selected in accordance with the Birla Sunlife AMC process. The top five holdings are Aditya Birla Sunlife Medium Term Fund, SBI Dynamic Bond Fund, Franklin India Short-term Income Retail Plan, IDFC Dynamic Bond Fund and Aditya Birla Sunlife Dynamic Bond Fund. The one-year return of the fund is 3.42% as against the category average of 5.34%. The expense ratio of the fund is 1.11%. The fund is benchmarked against CRISIL Composite Bond Index. The fund has been managed by Mr. Shravan Kumar Sreenivasula since December 2014.

 

FT India Dynamic PE Ratio Fund of Funds Gem

Launched in October 2003, the AUM of Franklin India Dynamic PE Ratio Fund of Funds is an impressive Rs 869 crore. This is a fund of fund scheme which invests in funds from within the Franklin Templeton basket of funds. Through this structure it provides exposure to both equity and debt asset classes. The equity component is invested in Franklin India Bluechip Fund or Franklin India Prima Plus. The debt component is invested in Franklin India Short Term Income Fund or Franklin India Income Opportunities Fund. The Franklin India Dynamic PE Ratio Fund of Funds has a unique in-built “buy-sell” discipline based on market valuations. This gives less room for subjectivity or any error of judgment. The fund has a predefined monthly rebalancing mechanism based on the “PE” level of Nifty 50. It reduces equity exposure and increases debt exposure when PE levels are high and vice versa. This fund is suitable for those who are not only keen to take advantage of the growth opportunities in equities but also prefer to reduce the impact of market volatility. The scheme aims to provide long-term capital appreciation with relatively lower volatility through a dynamically balanced portfolio of equity and income funds. The equity funds allocation will be determined based on the month-end average PE Ratio of NSE Nifty. This predominantly large cap fund has an allocation to equity of 33.55%, with finance, automobile and energy being the top three sectors at present. The one-year return of the fund is 10.79% as against the category average of 11.24%. The expense ratio is at 1.89%. The fund is benchmarked against the CRISIL Balanced Fund – Aggressive Index. The fund has been managed by Mr. Anand Radhakrishnan since Feb 2011.

FUND FLAVOUR

February 2018

Juggling its way…

Fund of Funds (FoFs) or multi-manager funds, as they are otherwise known, are funds which invest in other mutual funds. Fund of funds do not invest directly in stocks, bonds or other securities, but mandate asset allocation to other fund managers, who might be able to offer a variety of investment strategies. They allow broad diversification, appropriate asset allocation with investment experts in a variety of fund categories – appealing especially to small investors who want to get better exposure with fewer risks by protecting their investments from severe losses caused by uncontrollable factors such as inflation and counterparty default, compared with directly investing in securities. Technically, FOFs help diversify risk and look to make long-term returns but they charge higher management fees. In simple terms, instead of investing in securities directly, a multi-manager fund will invest in the best mutual fund schemes available in the industry. Thus, the performance of a fund of fund is directly linked to the performance of underlying mutual funds where the scheme has invested. An FOF is essentially one mammoth fund holding a portfolio of other investment funds – but can it now be viewed as a potential game-changer in India’s mutual fund sector, after enjoying nearly two decades of sizzling growth around the world?

Good, bad and ugly

Fund of funds or multi-manager funds may sound fascinating but several positive and negative aspects can be ascribed to them.

Here are some of the benefits of FoFs:
·         Investors can track performance through one single window rather than accessing different accounts. In addition, it takes away the pain of deciding in which fund to invest.
·         Such funds offer fund manager and brand diversification since some FoFs invest in funds managed by different fund managers.
·         Investors do not have to fret about changing their asset allocation. The fund manager takes a call on the level of exposure to each asset class depending on the prevailing market condition. FOFs serve as an investor’s proxy. The fund of funds manager performs due diligence, and manages the selection process and oversight of the funds under their company’s management. Through a FOF, investors benefit from professional management services and also from greater transparency regarding the fund’s holdings and investment strategy.
·         The formal due diligence process allows FOFs to hire managers who have reputable experience in managing a portfolio of investments. The process entails conducting background checks of new fund managers to know their history and if they have ever been involved in activities that may affect the performance in the fund. The FOFs may contact security firms to conduct background checks, along with reviewing the manager’s credentials. Through this process, a fund may weed out managers with a bad reputation or a history of underperformance.
·         An FOF aims at diversifying the risk of a single fund by investing in several types of funds. An investor with limited capital can invest in one FOF and get a diversified portfolio consisting of, for example, gold, equity, and debt. Such a portfolio combination is rarely found in the average mutual fund. The FOF’s asset allocation mechanism reduces risk exposure with the aim of protecting investors from uncontrollable factors that may wipe away their investments. For example, if an investor only held bonds in a company that was later downgraded by a rating agency, the bond would decline in value. However, if an investor held a single FOF, his risk would be diversified across several investments.

But like everything, even multi-manager funds have their disadvantages: 

·         The TER (Total Expense Ratio) is on the higher side as investors are charged for both the underlying funds and the primary fund. FoFs are allowed to charge 0.75% over and above the expense ratio of the primary fund.
·         FoFs are taxed as debt funds. Investors can avail indexation benefits after three years, wherein gains are taxed at 20% after adjusting for inflation during the tenure of the investment.
·         Although diversification is considered a favorable strategy for reducing risk exposure, it may not result in optimal gains because the process of selecting funds managed by a large pool of fund managers is a difficult task. Investments aimed at broad diversification tend to underperform during times when only one or two market sectors or asset classes are performing well. Investors should also understand that the past performance of the fund and its manager does not guarantee results in the future.
 

Results Matter

There are enough studies to suggest that more than 90% returns are determined by asset allocation and the rest by stock and bond picking skills. It is difficult to judge a product based on only one bull or bear cycle. Its robustness should be measured over at least two full cycles.

There are different types of FoFs in the market. For instance, some FoFs invest purely in equity funds or debt funds while others diversify by investing in commodities like gold, equity and debt funds. The other category of FoFs invests in overseas funds which have exposure to international markets.

While some of the Equity-oriented FoFs and Gold FoFs incurred losses, almost all the hybrid and debt-oriented FoFs raked in profit. In the Equity-oriented FoF category, Principal Global Opportunities Fund is the front-runner earning 33.8% followed by Quantum Equity FoF at 27.1% and HSBC Managed Solutions Growth Fund at 24.3%. In the Hybrid FoF category, Invesco Pan European Equity Fund at 22.9%, Invesco Global Equity Inc. at 20.9% and ABSL FP FoF at 20.4% are the toppers while ICICI Prudential Dynamic Accrual Plan at 6.2%, IDFC All Seasons Bond at 5.3% and HSBC Managed Solutions Conservative Fund at 4.5% are the toppers in the Debt-oriented FoF category.

…into the world of Asset Management?

Theoretically, FoFs may seem appealing but that may not necessarily be true. This is because not all funds normally invest in schemes of other fund houses. While some funds known as Fettered Funds invest in in-house schemes only, Unfettered Funds invest in a mix of funds offered by other AMCs and in-house schemes. For instance, Birla Sun Life Financial Planning Fund FoF - Aggressive Plan invests in Kotak Gold Exchange Traded, Birla Sun Life Cash Plus, Mirae Asset India Opportunities Fund and Birla Sun Life Frontline Equity Fund, among others. FoFs typically invest in direct plans of other schemes. Quantum Equity FoF is the only fund which invests in schemes of other fund houses. These funds are typically designed for passive investors. Advisors are not enthusiastic about such products and say that investing in equity and debt funds separately is more useful than investing in FoFs. But FoFs cannot be written-off in general…..opt for well-managed funds in this category.