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Will Passive Management Of ICICI Prudential India Equity Fund Of Fund Work
Feb 11, 2020

ICICI Prudential Mutual Fund has launched another passively managed fund in the form of Fund of Funds.

ICICI Prudential India Equity Fund of Fund (IPIEFOF) is the latest offering from the fund house, where the scheme will invest in units of other equity schemes from ICICI Prudential Mutual Fund and other fund houses.

What is a Fund of fund (FOF)?

As per regulations, a Fund of fund is a scheme that invests a minimum 95% of total assets of the scheme in the underlying fund/s. A FOF is a unique investment proposition because it is a mutual fund scheme that invests in schemes of other mutual funds offering a well-diversified product to reduce the volatility involved.

This modus operandi allows investors to hold a single product rather than directly investing in various regular mutual fund schemes to provide optimum returns from a portfolio of well researched funds.

As you may be aware, a passively managed fund mirrors the performance of its benchmark index and does not require active management. The manager of such a fund buy only the stocks of the underlying index and exits a certain stock only when the respective stock exits from the index and is replaced by another one.

[Read: Why Are Fund Houses Introducing Passively Managed Funds Now]

IPIEFOF will invest in units of equity-oriented mutual fund schemes, offer benefits of diversification across various equity schemes within the prescribed limits and decent returns to investors.

Therefore, it is suitable for all investors, particularly novice investors, looking to park their money for an investment time horizon of medium term.

Table 1: Details of ICICI Prudential India Equity Fund of Fund

Type An Open-ended Fund of Funds scheme investing in units of equity-oriented schemes. Category Fund of funds
Investment Objective To generate returns by predominantly investing in one or more mutual fund schemes /ETFs (managed by ICICI Prudential Mutual Fund or any other Mutual Fund(s)) which invest in equity and equity related securities.
However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans
  • Direct*

Options
  • Growth*
  • Dividend
    • Re-investment*
    • Pay-out

*default option

Entry Load Not Applicable Exit Load
  • If the amount sought to be redeemed or switched out within 12 months from allotment: 1.00% of applicable NAV
  • If the amount sought to be redeemed or switched out more than 12 months from allotment: Nil.
Fund Manager Mr Dharmesh Kakkad Benchmark Index S&P BSE 500 TRI
Issue Opens: February 5, 2020 Issue Closes: February 19, 2020
(Source: Scheme Information Document)

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How will the ICICI Prudential India Equity Fund of Fund allocate its assets?

Under normal circumstances, the scheme's asset allocation pattern will be as under:

Table 2: IPIEFoF's Asset Allocation
Instruments Indicative Allocation
(% of Total Assets)
Risk Profie
High/ Medium/Low
Maximum Minimum
Units of equity-oriented schemes / ETFs investing in equity and equity related securities 100 95 Medium to High
Money Market Instruments (with maturity not exceeding 91 days) including Tri-Party Repo*, cash & cash equivalents 5 0 Low to Medium
*or similar instruments as may be permitted by RBI/ SEBI.
(Source: Scheme Information Document)

What will the Investment Strategy be?

As a fund of funds scheme, ICICI Prudential India Equity Fund of Fund will invest in units of equity oriented mutual fund schemes / ETFs managed by ICICI Prudential Mutual Fund or any other Mutual Fund(s) within the asset allocation pattern.

The fund manager, based on the outlook of the invested scheme, will decide on the weightage to be assigned to one or more mutual fund scheme / ETF.

Subject to the Regulations, the corpus of the Scheme can be invested in any (but not exclusively) of the following securities:

Units of various domestic equity-oriented schemes / ETFs (managed by ICICI Prudential Mutual Fund or any other Mutual Fund)

Obligations/ Term Deposits of banks (both public and private sector) and development financial institutions.

Money market instruments permitted by SEBI/RBI

The units of the schemes of the Mutual Funds in which the Scheme proposes to make investments in could be listed or unlisted, open/closed ended.

Who will manage the scheme?

Mr Dharmesh Kakkad would be the designated Fund Manager of the Scheme. He is a Commerce Graduate, Chartered Accountant and holds a USA CFA Charterholder to his credit.

He is associated with ICICI Prudential Asset Management Company Limited from June 2010. Prior to working in Dealing function, he was working in the Operations Department of ICICI Prudential AMC.

At ICICI Prudential Mutual Fund, Mr Kakkad manages ICICI Prudential Moderate Fund (FOF), ICICI Prudential Bharat Consumption Fund, ICICI Prudential Passive Strategy Fund (FOF), ICICI Prudential Asset Allocator Fund (FOF), ICICI Prudential Equity - Arbitrage Fund, ICICI Prudential Balanced Advantage Fund, ICICI Prudential Equity Savings Fund, ICICI Prudential Thematic Advantage Fund (FOF) and ICICI Prudential Global Advantage Fund (FOF)

The outlook for ICICI Prudential India Equity Fund of Fund:

ICICI Prudential India Equity Fund of Fund is a passively managed fund that invest predominantly in equity schemes of the ICICI Prudential Mutual Fund or other fund houses. Hence the fortune of the fund relies on the performance of those schemes.

Any change in the investment policies or fundamental attributes of the underlying schemes will affect the performance of the scheme held in the portfolio. Currently the market environment is euphoric, and the bulls are taking over. However, one can't rule out the probability of volatility involved as the muted earnings of corporates of India Inc., global markets falling due to corona virus outspread and continued growth tensions.

[Read: How to Make the Most of Market High With Best Mutual Funds]

Another noteworthy point is, IPIEFOF's total expense ratio, including weighted average of the total expense ratio levied by the underlying scheme(s), shall not exceed the eligible percent of the daily net assets of the scheme and would be in line with the regulations.

It will be slightly higher compared to the underlying schemes held in the portfolio because a FoF pays the fee at its level as well as on the underlying mutual fund investment schemes in which it is invested in for periodical rebalancing, which could result in higher transaction costs.

So, before you invest in ICICI Prudential India Equity Fund of Fund, you need to check whether the investment objectives and the asset allocation are followed and suit your investment objectives as well. Also, you need to be ready to bear the high net expense fee.

Editor's note: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!

Author: Aditi Murkute

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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