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Of Fund of Funds and Multimanagers… Fund of Funds have carved a prominent position on the pedestal with performance not hinged on a single fund manager and automatic periodic rebalancing with minimum monitoring. Patchwork portfolio and “cost of costs” do raise their ugly head and disfigure the otherwise flawless sculpture….. Of faux pas and mayhem! · Less than 10% of the fund managers have a ten-year record. · A paltry one fifth have a five-year record. · Half have spent a mere two years or less at the helm of their funds. The odds are stacked against us. The fund management industry has risen to the occasion! It has faced these frightening facts with foresight by offering fund/manager research and selection in one product: a Fund of Fund (FoF) or a Multimanager Fund. Funds as building blocks… FoFs are mutual fund schemes that invest in other mutual fund schemes. Prominent players include Kotak Equity FoF, Fidelity liquid FoF etc.
Managers as building blocks… Multi manager funds cherry-pick the underlying fund managers in such a way that each brings a different style to the table that dovetail seamlessly into a complete portfolio. The fund is carved into small chunks with segregated mandates, tailored to their precise requirements, with each manager responsible for his/her own segment. OptiMix Financial Planning Multi Manager FoF Scheme is a multi manager Fund.
Are more minds better than one? Or do too many cooks spoil the broth? Those are the questions you need to ask when you consider whether to invest in a FOF or multi-manager mutual fund, which is one of the greatest ideas that has tread the path of the fund industry. Churning cheers ! The positive spin is that the FoF/multi-manager approach combines the top picks from some of the India’s leading funds/money managers with double diversification across asset classes and investment style. Convenience in investing and monitoring and affordability with a wide reach is the forte of FoFs and multimanager funds. Suppose you wanted to invest in 5 equity funds and 5 debt funds. Assuming each fund has a minimum stipulated investment of Rs 5,000, you would need Rs 50,000. In a FoF, Rs 5,000 would do the job. Fund of funds can often invest in desirable institutional funds that are outside the purview of retail investors like you. They also have the ability to invest in some load funds without paying the load. The movement of the fund managers from one fund to the other does not affect the performance of FoFs or multimanager funds since they are not at the mercy of a single fund manager but draw expertise from a smart pool. Asset allocation accounts for 90% of portfolio performance. Portfolio rebalancing is one of the greatest benefits that FoFs and multimanager funds offer. Rebalancing involves capital gains tax, if you do it by holding individual mutual funds. When a FoF does it, there is no long/short term capital gains tax, which can be as high as 30% on short-term capital gains in a debt-fund. Moreover, you end up selling when the markets are rising and buying when the markets are falling, thanks to rebalancing.This psychological benefit transcends time and the ill-effects of market timing. Whipped while whipping! On the flip side, Single AMC FoFs or Feterred FoFs which invest in different funds of the same AMC are more prevalent and will not be truly diversified with duplication of holdings and style and unfeterred FoFs result in a patchwork portfolio that lacks any clear direction or investment philosophy. The effective cost for you works out to around 3.25%(equity) and 2.25%(debt) for FoFs which charge an extra 0.75% as annual management fees over and above fees of 2.5 % and 1.5% for equity and debt funds respectively. Your post-tax returns will take a beating if you invest in an equity FoF since you will be liable to pay dividend distribution tax of 14.03% or LTCG tax of 10% (without indexation), which is otherwise not applicable for a normal equity mutual fund. Is the skimmed crème de la crème for you? Yes, indeed, if you are keen on savouring the rich variety, enormity, economy, churn and convenience coupled with automatic rebalancing and market timing of this concept whose time has come. .
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n Mrs. Lalitha Muthu e-mail : lalitha_ppm@yahoo.com |
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Articles by Lalitha Muthu |
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… Of Fund of Funds and Multimanagers… |