Fund of Funds on their way

Here's a story in Hindu Business Line by Nilanjan Dey. Feedback may be sent to nilanjan@thehindu.co.in .

One question that I have in mind is how do they compare with ETFs. I guess ETFs are less expensive and is a much larger diversification. Any way read this story by Nilanjan Dey

If there is one class of products that is not fully appreciated by MF investors, it is the FoF (Fund of Funds). Opinion now may 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.

Ask Mr Sumeet Vaid, one of its most resolute defenders. As Chief Marketing Officer at OptiMix, the multi-manager arm of ING Investment Management, he knows all about the common investor's penchant for stand-alone, single-manager funds. He has to constantly talk to clients about the merits of creating a portfolio of equity and debt funds, choosing from an assortment range of funds, each with an investment style of its own.

Selecting the best fund managers is not easy, as anyone faced with this diversity in the country's MF space will realise. And diverse it has truly become. Just check out the numerous competing products and you will know.

An FoF, in 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, says Mr Vaid, is the core of an FoF's unique selling proposition. The process, he adds, paves the way for sensible asset allocation.

Talking of selling propositions, investors must be told about the risks as well. For this, let's check out OptiMix's latest offer, a three-year product that will be benchmarked against the Crisil balanced fund index. To begin with, an investor needs to be aware that such an 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.

As the offer document indicates quite clearly, the first will be on investments/redemptions/switches in the options under the scheme. The second will be on the scheme's investments/redemptions/switches in the options under the underlying schemes.

The offer document also underscores the fact that investors are incurring expenditure at both the FoF level and the schemes in which it invests. Their returns may, therefore, be impacted by this; such returns may on occasions be lower than what may be secured if investors directly invest in those schemes.

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.