FUND FULCRUM

February 2015

The year 2015 has begun on a good note for the mutual fund industry.  Thanks to healthy inflows in equity and liquid funds, the mutual fund industry’s assets grew by 12% or Rs. 1.30 lakh crore from Rs.10.51 lakh crore in December 2014 to touch an all-time high of Rs.11.81 lakh crore in January 2015. The country's 45 fund houses together had an average AUM of Rs 11,81,356 crore at the end of January 31, 2015 up from Rs 10,51,343 crore at the end of December 2014, according to the data by Association of mutual funds in India (AMFI). The AUM data for individual fund houses is not being disclosed. Besides, retail participation in equity schemes has increased significantly during the recent months. The fund houses together witnessed an inflow of more than Rs 1 lakh crore. During January 2015, BSE's benchmark Sensex grew by over 1,683 points or nearly 6%. The share of equity oriented schemes in mutual fund assets has been growing since March 2014, increasing from 22% to 30% in December 2014. The proportionate share of debt-oriented schemes has fallen from 52% to 45% during the same period.

Equity mutual funds witnessed an addition of over 16 lakh investor accounts or folios in the first 10 months of the current fiscal (2014-15) in view of a sharp rally in the stock market. According to Securities and Exchange Board of India data on investor accounts with 45 fund houses, the number of equity folios rose to 30,799,002 in January 2015, from 29,180,922 for the whole of last fiscal ending March 31, 2014 - a gain of 16,18,080 folios. The addition in equity folios is in line with BSE's benchmark Sensex surging by 30% in the ten months of the current financial year. Moreover, mutual funds industry reported net inflows of nearly Rs 56,000 crore in equity funds in the April-January period, which helped the industry grow its folio count. Overall, the industry retail folios surged to 4.07 crore at January-end 2015 from 3.95 crore at the end of March 2014.

In January 2015, the industry received net inflows of Rs. 85,848 crore in liquid funds. Apart from inflows in liquid funds, equity funds too saw net inflows of Rs. 6,324 crore in January 2015.  Investors poured in over Rs.13,000 crore in equity funds (new launches and existing schemes) while redemptions stood at Rs. 6,600 crore.  As a result, the total AAUM of equity funds (including ELSS) reached an all-time high of Rs.3.40 lakh crore in January 2015. Since the beginning of FY 2014-15, equity funds have seen positive inflows each consecutive month. From April 2014 to January 2015, the industry has attracted inflows of over Rs. 57,000 crore in equity funds. Investors flocked to income and gilt funds on expectations of a further rate cut by RBI. In January 2015, RBI slashed repo rate by 25 basis points which resulted in healthy inflows in both income and gilt funds. Income funds, which saw a marginal outflow of Rs.1,632 crore in December 2014, received net inflows of Rs.12,000 crore in January 2015. Gilt funds received net inflows of over Rs.1,800 crore in January 2015. Investors continued to shun gold ETFs due its lackluster performance. The category saw net outflows of Rs.131 crore in January 2015. Meanwhile, other ETFs, which track the equity indices, received inflows of Rs. 128 crore in January 2015. Overseas fund of funds saw net outflows of Rs.102 crore in January 2015. Last month, overseas FOFs saw net outflows of Rs.162 crore. There are 31 international funds in the industry which manage Rs. 2,500 crore. 

The contribution of the country's smaller towns -- known as beyond-15 cities (B15) -- to mutual funds asset base has surged by 31% over the last nine months of the current fiscal (2014-15) to Rs 1.85 lakh crore. Mutual Funds assets under management (AUM) from B15 locations grew from Rs 1.41 lakh crore during March 2014 to Rs 1.85 lakh crore at the end of December 2014, according to data from the Association of Mutual Funds of India (AMFI). About 16.3% of the assets of the mutual fund industry came from B15 locations in December 2014 as compared to 15.6% in March 2014. However, the share of T15 locations or top 15 cities in the assets of the mutual fund industry, dropped from 84.4% to 83.7% during the period under review. Together, all 45 mutual fund houses manage assets worth over Rs 11 lakh crore. The increase in contribution from B15 cities can be attributed to investor awareness and education programmes by mutual fund houses as well as incentive schemes launched by capital markets regulator SEBI. B15 cities are those which are beyond these top 15 cities -- New Delhi (including NCR) Mumbai (including Thane & Navi Mumbai), Kolkata, Chennai, Bangalore, Ahmedabad, Baroda, Chandigarh, Hyderabad, Jaipur, Kanpur, Lucknow, Panjim, Pune, and Surat. Interestingly, the rate of growth in assets for B15 locations was higher than industry average of 26%. B15 locations have a better balance of equity and non-equity assets. T15 locations are skewed in favour of non-equity assets due to the concentration of institutional investors, according to AMFI. There was a shift away from non-equity schemes to equity schemes since March 2014. This was more marked in T15 locations. 

Piquant Parade

L&T Mutual Fund, a subsidiary of L&T Finance Holdings, became one of India's primary brands to launch a Facebook application for its investors. The Facebook app will allow investors to view their L&T Mutual Fund portfolios with latest valuation. The app, which is named GoInvest, is designed to ease the exchange of information between investors and the brand, while managing to sustain their interest and educate them on the mutual funds industry. GoInvest also features a convenient option to request an account statement by email. This move will allow investors to execute actions from the familiar comfort of their Facebook accounts and this is what makes it unique and customer oriented.

Axis Mutual Fund, the asset management arm of Axis Bank, has launched 'EasySell', the online platform that empowers distributors to carry out the entire transaction process digitally, without the hassle of filling any document, thereby saving time for investors.  EasySell offers a hassle-free and convenient way of transacting, as it does away with the need for paper work and saves a lot of time. Distributors empanelled with Axis Mutual Fund can use the EasySell service, by completing a simple registration process on EasySell portal. The service also provides security to investors. In case of any transaction initiated by the distributor, an alert message will be sent to the investor’s mobile number requesting approval on transaction through Axis Mutual Fund EasyApp.

Competition Commission has approved, Japanese financial services giant, Nippon's proposed deal to hike its stake in India's top fund house Reliance Mutual Fund to 49% in multiple tranches. The Japan-based firm already holds 26% stake in RCAM, which it had acquired for Rs 1,450 crore in 2012 while valuing the company at Rs 5,600 crore at that time. Under the proposed deal, Nippon Life Insurance Company would first acquire 9% additional stake of Reliance Capital Asset Management Limited for about Rs 657 crore. Further, Nippon would have the option to hike its stake to 49% in multiple tranches at prices to be determined on the basis of  future prevailing assets and profitability of the company that are expected to be higher than the current levels.

Yes Bank will enter into the mutual fund business next fiscal through organic or inorganic route. The asset management company of Yes Bank will complement the bank's retail strategy.

Regulatory Rigmarole

From March 1, 2015 investors will have unified single statement for all dematerialised accounts across the capital market products, according to the National Securities Depository Ltd (NSDL). This means that an investor would get a unique ID number through which a comprehensive picture of all his/her market investments will be available in one statement. The information of demat accounts for equity, debt, bond and mutual fund investments of one individual investor or entity will formally be clubbed in a single statement. A digital connection has already been established for such an exercise. This is a first step towards achieving single demat account for all financial assets. Initially, the demat accounts synchronisation and unification of all SEBI-regulated capital market products have been taken up. All other dematerialised products would gradually come under one umbrella account in future.

Mutual funds may soon be unable to dole out steep commissions to distributors and find it tough to send them to exotic locales for selling their products. Securities and Exchange Board of India is planning to cap the upfront commission that mutual funds pay distributors and get the industry to move to a predominantly trail-fee model, in which fees are paid in a staggered manner till the time their clients remain invested in a scheme.The capital market regulator is considering limiting the total value of upfront fees, jaunts, and various sales contests at 50 basis points in addition to the trail fee. This means the money that fund houses pay distributors or spend on them at the time of selling the scheme should not exceed this amount. Currently, there are no restrictions on how much a mutual fund can spend on distributors as long as it is financed from its pocket. Sebi's decision to impose such restrictions on selling of mutual funds comes in the wake of the high commissions the industry paid distributors last year to sell new fund offers (NFOs).

In the fund management industry, dominated by the stalwarts, there are quite a few small ones who have been around for a long time or have entered in the last few years in the space. Some weaker ones either surrendered (sold out) or are stagnating. However, there are a few Davids who are walking their own path to create a space for themselves in this financial jungle dominated by the Goliaths. The David has to be different to stand out because he cannot otherwise survive against the Goliath with the same offering and strategies as the bigger players. These Davids are setting new benchmarks in the otherwise Goliath dominated fund management industry. They are successfully penetrating the investors mind and are able to get a slice of their wallet. Setting new benchmarks with 'Client First' initiatives are always welcome. Historically the Davids have created a niche in the industry and the Goliaths are ready to buy out these businesses when the Davids want to exit due to different reasons. This creates a safety net for long term investors. Besides, the regulator (SEBI) is proactive and investor centric, thus, taking away the fear of an investor of being left high and dry. To sum it up, be an informed investor and invest to meet your goals. The industry is becoming more and more client centric, with some niche players playing a bigger role.

NFO NEST

February 2015

NFOs of multifarious tinges continue to flood the market in the February 2015 NFONEST.

LIC Nomura Midcap Fund

Opens: February 2, 2015

Closes: February 16, 2015

LIC Nomura Mutual Fund has launched a new fund as LIC Nomura Midcap Fund, an open ended equity fund. The investment objective of the fund is to generate long term capital appreciation by investing substantially in a portfolio of equity and equity linked instruments of midcap companies. The fund shall invest 65% to 100% of assets in equity and equity related instruments of mid cap companies and up to 35% in debt and money market instruments (including investment in securitised debt) with medium to high risk profile. Investment in securitised debt will be up to 10% of the net assets of the fund. The benchmark index for the fund is CNX Midcap Index. The fund managers are Nobutaka Kitajima and Sachin Relekar.

HSBC Global Consumer Opportunities Fund

Opens: February 2, 2015

Closes: February 16, 2015

HSBC Mutual Fund has launched a new fund as HSBC Global Consumer Opportunities Fund, an open ended fund of funds. The investment objective of the fund seeks to provide long term capital appreciation by investing predominantly in units of HSBC Global Investment Funds (HGIF) China Consumer Opportunities Fund. A certain proportion of its corpus will also be invested in money market instruments and / or units of liquid mutual fund schemes, in order to meet liquidity requirements from time to time. The fund would invest 95-100% of assets in units issued by HGIF China Consumer Opportunities Fund and invest up to 5% of assets in money market instruments (including CBLO & reverse repo) and units of domestic mutual funds. The benchmark index for the fund is MSCI AC World Index. The fund managers are Anitha Rangan and Sanjay Shah.

ICICI Prudential Capital Protection-oriented Fund VII–Plan G

Opens: February 2, 2015

Closes: February 16, 2015

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund VII - Plan G, a close ended capital protection oriented fund. The tenure of the fund is 1285 days. 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 provide capital appreciation by investing the balance in equity and equity related securities. The fund would allocate 70%-100% of assets in debt securities and money market instruments with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with medium to high risk profile. Benchmark index for the fund is CRISIL MIP Blended Index. The fund managers are Vinay Sharma (equity portion), Aditya Pagaria, Chandni Gupta, and Rahul Goswami (debt portion), and Shalya Shah (for investments in ADR / GDR and other foreign securities).

SBI Dual Advantage Fund – Series VII

Opens: February 2, 2015

Closes: February 16, 2015

SBI Mutual Fund has unveiled a new fund named as SBI Dual Advantage Fund - Series VII, a close ended hybrid fund. The tenure of the fund is 1111 days from the date of allotment. The primary investment objective of the fund is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the fund. The secondary objective is to generate capital appreciation by investing a portion of the fund’s corpus in equity and equity related instruments. The fund will invest 55%-95% of assets in debt and debt related instruments, invest up to 10% of assets in money market instruments with low to medium risk profile, and invest 5%-35% of assets in equity and equity related instruments including derivatives with high risk profile. Benchmark index for the fund is CRISIL MIP Blended Fund Index. Rajeev Radhakrishnan shall manage debt portion and Richard D`souza shall manage investments in equity and equity related instruments of the fund.

DSP BlackRock Dual Advantage Fund – Series 35 – 36M

Opens: February 4, 2015

Closes: February 18, 2015

DSP BlackRock Mutual Fund has launched a new fund named as DSP BlackRock Dual Advantage Fund - Series 35 - 36M, a closed ended income fund. The primary investment objective of the funds is to generate returns and seek capital appreciation by investing in a portfolio of debt and money market securities. The funds also seek to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. As far as investments in debt and money market securities are concerned, the funds will invest only in securities which mature on or before the date of maturity of the funds. The fund shall invest 50-95% in debt securities, up to 15% in money market securities with low to medium risk profile, and 5-35% in equity and equity related securities with high risk profile. Benchmark index for the fund will be CRISIL MIP Blended Index. The fund will be managed by Dhawal Dalal and Vinit Sambre.

BOI AXA Credit Spectrum Fund

Opens: February 6, 2015

Closes: February 20, 2015

BOI AXA Mutual Fund has launched a new fund as BOI AXA Credit Spectrum Fund, an open-ended debt fund. The tenure of the fund will be 41 months from the date of allotment. The investment objective of the fund is to generate capital appreciation over the long term by investing predominantly in corporate debt across the credit spectrum within the universe of investment grade rating. To achieve this objective, the fund will seek to make investments in rated, unrated instruments, and structured obligations of public and private companies. The fund will invest 80%-100% of assets in corporate debt (including securitised debt) with medium to high risk profile and invest up to 20% of assets in money market instruments with low risk profile. Investment in securitised debt will not exceed 50% of the net assets of the fund as at the time of purchase. The benchmark index for the fund is CRISIL Composite Bond Fund Index. The fund manager will be Alok Singh.

SBI Banking and Financial Services Fund

Opens: February 11, 2015

Closes: February 24, 2015

SBI Mutual Fund has launched a new fund as SBI Banking & Financial Services Fund, an open ended sector fund. The investment objective of the fund is to generate long-term capital appreciation to unit holders from a portfolio that is invested predominantly in equity and equity related securities of companies engaged in banking and financial services. The fund shall invest 80%-100% in equity and equity related securities of companies engaged in banking and financial services with high risk profile and up to 20% in debt and money market instruments with low to medium risk profile. The benchmark index for the fund is CNX Finance Index. The fund manager will be Sohini Andani.

Canara Robeco Capital Protection-oriented Fund - Series 4

Opens: February 12, 2015

Closes: February 24, 2015

Canara Robeco Mutual Fund has launched a new fund named as Canara Robeco Capital Protection Oriented Fund - Series 4, a close ended capital protection oriented fund. The tenure of the fund is 37 months from the date of allotment. The investment objective of the fund is to seek capital protection on maturity by investing in fixed income securities maturing on or before the tenure of the fund and seeking capital appreciation by investing in equity and equity related instruments. The fund would allocate 70% to 100% of assets in Indian debt instruments and money market instruments with low to medium risk profile and up to 30% of assets in equity and equity related instruments with medium to high risk profile. Benchmark index for the fund is CRISIL MIP Blended Index. The fund managers will be Krishna Sanghavi and Suman Prasad.

Pramerica Diversified Equity Fund

Opens: February 11, 2015

Closes: February 25, 2015

Pramerica Mutual Fund has launched a new fund as Pramerica Diversified Equity Fund, an open ended equity fund. The investment objective of the fund is to generate income and capital appreciation by predominantly investing in an actively managed diversified portfolio of equity and equity related instruments including derivatives. The fund shall invest 65%-100% of assets in equity and equity related instruments with high risk profile and up to 35% in cash, money market, debt securities, liquid and debt schemes of Pramerica Mutual Fund with low to medium risk profile. The benchmark index for the fund is S&P BSE 200 Index. The fund managers are Brahmaprakash Singh - Equity portfolio and Ritesh Jain - Debt portfolio.

Canara Robeco India Opportunities Fund - Series 2, R*Shares NV20 ETF, Reliance Banking and PSU Debt Fund, Pramerica Build in India Fund - Series 1 to 2, Union KBC Capital Protection-oriented Fund – Series 6, Reliance Capital Builder Fund III ( Series A to Series C), SBI Balanced Opportunity Fund- Series I to III, Principal Arbitrage Fund, Pramerica E-commerce Fund – Series 1 to 2, UTI Flexicap Bluechip Fund, R*Shares CNX Midcap ETF, ICICI Prudential Manufacture in India Fund, Birla Sunlife Retirement Fund, DSP BlackRock Equity Income Fund, and DSP BlackRock Equity Advantage Fund - Series 1 to 5 are expected to be launched in the coming months. 

GEMGAZE

February 2015

Taste FoF, but not with a blind eye!

There are a plethora of schemes on offer from the Indian mutual fund industry. So, why should an investor pick up FoF which is a basket of various mutual fund schemes? Touted as ‘one-stop’ shop for investment needs, these funds are designed to offer benefits like access to portfolio of various top-performing funds with just one investment, diversification across asset classes and investment styles, free from worries of choosing and buying or selling of stocks and the in-built rebalancing feature which ensures that market movements do not change the desired asset allocation. Normally, market movements make asset allocation go awry and frequent rebalancing is cumbersome and is inefficient from a tax perspective. FoF simplifies the investment process for investors who currently have to invest in a range of schemes to achieve their desired asset allocation. The different style attributes mitigate the risk contribution by each component.

All the GEMs from the 2014 GEMGAZE have performed reasonably well in the past one year and figure prominently in the 2015 GEMGAZE too.

FT India Lifestage 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 83 crore. The AUM of each plan is Rs 13 crore, Rs 7 crore, Rs 13 crore, Rs 11 crore, and Rs 39 crore respectively. The top three sectors in the portfolio are finance, chemical, and engineering. 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 49.24%, 36.87%, 28.92%, 20.08%, and 17.1% respectively. While the expense ratio for the plans is 1.29%, 1.42%, 1.53%, 1.56%, and 0.79% respectively, the portfolio turnover ratio is 8%, 10%, 10%, 8%, and 6% 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 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. The AUMs of the Very Aggressive, Aggressive, Moderate, Cautious, and Very Cautious Plans are Rs 5 crore, Rs 7 crore, Rs 5 crore, Rs 3 crore, and Rs 0.88 crore respectively. The top three sectors in the portfolio are finance, technology, and energy. The allocation to equity is 20.03%, 53.37%, 43.35%, 32.59%, and 0% respectively. The one-year returns of the plans are 32.17%, 37.04%, 31.05%, 25.64%, and 12.63% respectively. While the expense ratio for the plans is 0.75%, 0.74%, 0.74%, 0.74%, and 0.68% respectively,  the portfolio turnover ratio is 112%, 54%, 71%, 12%, and 0% 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 11 crore, Rs 5 crore, and Rs 3 crore respectively. The top three sectors for all the plans are finance, automobile, and engineering. The allocation to equity is 73.7%, 55.03%, and 24.46% respectively. The one-year returns of the plans are 46.72%, 37.77%, and 26.07% respectively. The expense ratio for all the plans hovers around 0.02%.

FT India Dynamic PE Ratio Fund of Funds   Gem

P/E funds are funds which rebalance their portfolios to take advantage of market movements. They base their investment strategy on some pre-determined P/E ratios of an index like Sensex or Nifty. FT India Dynamic PE Ratio Fund of Funds redirects your money into two good funds from the Franklin Templeton stable – Franklin India Bluechip Fund and Franklin India Short-term Income Plan. At present, the fund holds 49.42% in Franklin Bluechip Fund and 50.62% in Franklin India Short-term Income Plan. The AUM of the fund is an impressive Rs 822 crore. The FT India Dynamic PE Ratio Fund of Fund typically cuts down its equity exposure when the valuations rise. The fund, the oldest scheme in this segment, invests 50 to 70% of the money in equity funds if the weighted average PE of CNX Nifty falls between 16 and 20. When the Nifty PE quotes between 20 and 24, equity allocation stands at 30-50%. If the Nifty PE falls below 12, then the allocation to equity is in the range of 90 to 100%. The top three sectors in the portfolio are finance, energy, and technology. This predominantly large cap fund has an allocation to equity of 49% at present. The one-year return of the fund is 31.4% as against the category average of 31.44%. While the expense ratio is at 1.67%, the portfolio turnover ratio is 70%.

FUND FLAVOUR

February 2015

Fund Of Funds - High Society For The Little Guy

Buying a mutual fund is a bit like hiring someone to fix the brakes in your car. Sure, you could do the research, buy the tools and fix the car yourself (and many people do), but often it is not only easier but also safer to let an expert handle the problem. Mechanics and mutual funds may cost you a little more in fees, but there is nothing inherently wrong with paying extra for peace of mind. Mutual funds usually allow investors to skip the murky, confusing world of stock picking. But now regular investors have a way to get in on the action through fund of funds.

A smart way of investing in mutual funds

Fund of Funds offer investors a unique and excellent investment proposition. These are mutual fund schemes that invest in the schemes of other mutual funds. It takes the concept of mutual fund investing to another level. While mutual funds invest in stocks of various companies, Fund of Funds invest in the schemes of their own fund house or a third party fund house.

How does FoF work?

A fund of fund is one whose portfolio is selected from other investment funds, giving investors a double level of diversity in their portfolios. Just as fund managers for single-manager funds vary their approach to stock selection, managers of these FoFs choose the funds for their portfolio in a range of ways, with most of them using a combination of quantitative and qualitative research. Researchers will look at the ratings that funds have been awarded by reputed rating agencies; they will then delve further into the management and performance of potential portfolio members, and will often meet the managers of the single-manager funds. Funds of funds either operate with a single asset class, or as a mixed fund, such as a ‘Balanced’ fund which will invest in a range of different asset types. Mixed asset funds are particularly popular because they offer the investor a well-diversified portfolio, selected by an experienced fund manager, all within a single fund. Once investors have decided on their risk profile (sometimes categorised as Aggressive, Balanced, or Cautious) all further fund choices are left to the manager in charge of running the FoF. The manager will then monitor and manage the portfolio on behalf of the investor.

Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Gold based gold ETFs, Objective specific e.g. Life Stages FOFs, Style specific e.g. Aggressive/ Cautious FOFs etc, or overseas fund of funds, which invest across the globe.

There are three types of fund of Funds:

1. Funds which invest in other domestic mutual funds. Example, FT Life stage fund of funds, Kotak Equity FoF.

2. Funds, which invest in domestic exchange-traded funds (ETFs). Examples are Reliance Gold Saving, Kotak Gold Fund, Quantum Gold Savings Fund.

3. Funds, which invest in overseas mutual funds. Examples are Fidelity International Opportunities Fund, Franklin Asian Equity Fund, Kotak Global Emerging Market Fund, BNP Paribas China-India Fund, ICICI Prudential Indo Asia Equity -Retail, Fidelity Global Real Assets Fund, DSP BlackRock World Gold Fund – Growth, etc.

Fund of Funds stand out…

If one compares mutual funds to the supermarkets of the investment world, fund of funds (FOFs) would be something of a warehouse available to the retail buyer. Fund of funds can be extremely useful as they manage expertise of different funds and fund managers. They offer an incredible amount of variety, diversification and opportunity to investors, and this has been their key attraction point in the past few years. Moreover, in India a lot of FOFs allowed asset management companies (AMCs) to invest in their international funds run by their parent or partner firm, taking portfolio diversification to an entirely different level. It is during quick surges that equity funds will outperform FOFs. However, in a negative scenario, the utility of FoFs comes into play as they are spread over several asset classes and many times several markets as well. Another type of mutual fund, which also comes under the FOF bracket, is multi-manager fund. While these funds operate on a very similar level, the basic difference is that instead of investing with different funds, the fund invests with different fund managers, giving each one some amount of money to invest with. In India, ING Investment Management has a variety of multi-manager funds under the FOF segment.

...but still a fledgling in the Indian context

While FoF is still a relatively new concept in the Indian mutual fund space, it is no doubt getting investors’ attention. Fund of funds are traditionally segmented, based on the risk an investor is willing to take. Hence, if an investor is retiring soon he should choose a conservative FOF, while someone who still has a while to go before retirement may choose a more aggressive one. The major diversification advantage of an FOF is it enables one to invest in practically hundreds and thousands of stocks, without taking the risk of a single manager having to manage such a vast portfolio. An FOF allows experts in each category to manage their funds, and hence you have essentially invested in a fund, which is not a “jack of all trades” but hopefully a master of all. When it comes to portfolio planning, the most pressing question on most investors’ minds, or fund managers’ minds for that matter, is that of right asset allocation. The most commonly accepted “don’t”, about not putting all your eggs in one basket, is an often-cited fact. However, leading questions like how many baskets should you have or how many eggs should be in any basket at any given point of time are still answers we seek. Hence, an FOF which invests in an entirely different geographical area or just gives you the option of diversifying across various funds and the stocks invested in each of them, does help in eliminating the overall portfolio risk by spreading out.

While FOFs do offer investors, especially the new ones, a chance to instantly diversify their portfolio with the least amount of analysis or paper work, things can sometimes go awry as well. One of the main contentions here is, say if an FOF through its various fund holdings ends up holding similar stocks via many of these funds, the sole advantage of their diversification offers, would end up completely back firing. This is where the fund manager’s ability to pick and choose the right funds and managers to back, whilst maintaining a constant look at their holdings, needs to come into play. But FOFs are a little more costly than the normal mutual funds. This is because the expense fee charged by the underlying funds is added to their own expense fee, making the overall product a little costlier. However, if one were to look at a mutual fund as their solution for not wanting to spend too much time picking individual stocks, an FOF saves you time and anxiety by even choosing the mutual funds worth investing in. This additional cost is almost like a premium paid for a better product. All in all, the FOF market space is still highly underdeveloped in India and the number of schemes and offers are bound to keep increasing as the market opens up. Some of the FOFs available in the market have already done well, and it will be interesting to see how the newer ones do as, for if all goes well, FOFs may well be the new way to go for both the AMCs as well as investors.

The verdict

But before you invest in a FoF, you need to check whether the investment objectives and the asset allocation followed, suits your investment objectives as well. In addition, you need to be ready to bear the high net expense fee (which is higher than regular equity oriented mutual fund schemes), as an FoF pays the fee both at its level as well as on the underlying mutual fund investment schemes in which it is invested in. A FoF scheme is a worthwhile investment proposition for:

·         Small investors willing to build a portfolio of quality mutual funds

·         Investors who are new to mutual funds and lack resources for researching and choosing the right funds

·         Investors who want to eliminate the cost incurred on research and advise on investment in regular mutual funds

·         Investors who want to eliminate the hassle of maintaining and tracking their investment in multiple schemes

Do FoFs merit a second look?

If there is one class of products that is not fully appreciated by mutual fund investors, it is the Fund of Funds. Opinion may now be divided as to the FoF's real worth - it is probably much too early to examine that - but there is no denying that this category is here to stay. And actually prosper, if you listen closely to those who are championing its case. We know all about the common investor's penchant for stand-alone, single-manager funds. Selecting the best fund managers is not easy, as anyone faced with this diversity in the country's MF space will realise. An FoF, against this backdrop, can combine a number of single managers, each of whom may be acting differently, guided as they are by different investment mandates. That is the core of a FoF's unique selling proposition. The process paves the way for sensible asset allocation. Talking of selling propositions, investors must be told about the risks as well. To begin with, an investor needs to be aware that such a FoF will be as good as the funds it invests in. In other words, its performance will be shaped by whatever is done by these underlying schemes. Also, investments in the underlying assets will have to face such factors as performance of their portfolio, exposure to derivatives and security lending. It is important to realize that if the AMC levies an entry or exit load and the underlying funds do not waive the load charged on investments/redemptions, the investor concerned will incur load charges on two occasions. It may be pointed out that an FoF may normally provide a limited quantum of information on the underlying funds. It may not always be possible for a lay investor to access specific data, especially exact details of their portfolios. Having said all this, there is little doubt in our minds that FoFs will do better in the days ahead. One, there will be more products. Two, the performers among the current crop of FoFs will begin to attract more assets. Granted, these are still microscopic, particularly when compared to some of our giant stand-alone funds. How soon the situation will change is not for us to predict. But that change seems inevitable.