Fund of funds or multi-manager funds may sound interesting but do they deliver?
Fund of funds (FoF) or multi-manager funds as they are known in developed markets are funds which invest in other mutual funds. Simply put, instead of investing in stocks directly, a multi-manager fund will invest in the best 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.
There are different types of FoFs in the market. For instance, some FoFs invest purely in equity funds while others diversify by investing in gold, equity and debt funds. The other category of FoFs invest in overseas funds which have exposure to international markets.
Here are some of the benefits of FoFs:
- Investors can track performance through one single window rather than accessing different accounts. Also, 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 don’t 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.
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 do not get exemption on capital gains after a year. Instead, investors can avail indexation benefits after three years, wherein gains are taxed at 20% after adjusting for inflation during the tenure of the investment.
Returns
|
Scheme |
1-year % |
3-year % |
|
Franklin India Dynamic PE Ratio Fund of Funds |
-1 |
10 |
|
Birla Sun Life Asset Allocator Multi-Manager FoF Scheme |
-4 |
13 |
|
HDFC Dynamic PE Ratio Fund of Funds - Regular Plan |
-10 |
4 |
|
Kotak Asset Allocator Fund Regular Plan |
1 |
16 |
|
DSP BlackRock Dynamic Asset Allocation Fund - Regular Plan |
-1 |
|
|
Quantum Equity FoF Fund |
-9 |
16 |
|
Source: Value Research Returns as on March 09 |
||
Conclusion
Theoretically, FoFs may sound interesting but that may not be necessarily true. This is because not all funds normally invest in schemes of other fund houses. While some funds invest in in-house schemes only, others 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 other fund houses.
These funds are typically designed for passive investors. Advisors are not gung ho about such products and say that investing in equity and debt funds separately is more useful than investing in a FoF.
Let us know your thoughts.
