Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Fund of Funds - Building your portfolio the efficient way!! - Outside View by PersonalFN
Fund of Funds - Building your portfolio the efficient way!!

Building an efficient portfolio of wealth creating mutual funds is often seen as a daunting task by many of you investors. We too agree that it's not easy, as host of factors are involved and extensive data analysis need to be performed in order to have consistent performers in the investment portfolio so thatthe edgy feelingis refrainedfrom creeping in when the equity markets experience a downturn.

While some of you may say - "enough data is available on the internet" (on various websites) and I can go by star rated mutual funds, or "my mutual fund distributor / agent / relationship manager provides me with a good advise"; we believe that you or your mutual fund distributor may not have the skill sets for prudent extensive mutual fund research. And mind you there is more to mere assessment of past returns in the process of selecting winning mutual funds. It's noteworthy that it also involves analysis offactors such as:

Performance of peers in the category
√ Performance of the fund under consideration across phases of market cycles
√ Risk which the fund has exposed it investors to
√ Risk-adjusted returns
√ Portfolio characteristics (i.e. top-10 stock holdings, top-5 sector exposure and portfolio turnover ratio)
√ Costs of investing (i.e. expense ratio and exit load)
√ Investment processes and systems

Moreover, one can't rule out the fact that with vast number of schemes available confusion can mount thusmaking the task of selecting winning mutual funds portfolio more complex and dilemmatic.

Even those of you who are research oriented in your investment approach, the time and moneyspent (if source from a mutual fund research agency) makes it an expensive proposition. Also while you have selected winning mutual funds for your portfolio, makes not only tracking of the mutual fund schemes necessary but also leads to multiplicity of transactions, filling forms and maintain multiple account statements.

Hence given the aforementioned intricacies involved,while holding a portfolio of winning mutual funds may appear dispiriting, you have the comfort of enjoying a diversified portfolio of winning mutual funds by investing in a good Fund of Fund (FoF) scheme.

A FoF offers investors an excellent and a unique investment proposition, as it is a mutual fund scheme that invests in schemes of other mutual funds(thereby taking the concept of mutual fund investing to another level). While a mutual funds fund manager invests in stocks of various companies, a FoF scheme's fund manager invests in the schemes of their own fund house or a third party fund house(s) which may either be domestic or international. Hence, given the investment strategy FoFs follow, they allow you investors to hold a single product of various mutual funds rather than direct investing in various regular mutual fund schemes.

At present there are 108 FoF schemes, of which 70 are equity ones, 31 debt and 7 in the hybrid category.

Report card
Scheme Name 6-Mth (%) 1-Yr (%) 2-Yr (%) 3-Yr (%) 5-Yr (%) Since Inception (%) Std. Dev (%) Sharpe Ratio
Domestic Equity Oriented FoFs
Birla SL Asset Alloc-Aggr (G) -0.5 -6.1 7.7 14.6 12.6 16.7 6.12 0.15
FT India Life Stage FOFs-20 (G) -0.3 -1.6 9.7 12.3 11.2 17.6 6.57 0.11
ICICI Pru Advisor-Aggressive (G) 5.3 5.5 11.8 11.2 10.5 15.7 5.57 0.10
FT India Dynamic PE Ratio FOFs (G) 0.9 2.6 7.6 11.2 11.9 19.1 5.49 0.10
ING OptiMix 5 Star Multi-Mgr FoF (G) -2.4 -9.0 8.9 10.0 - 7.4 7.38 0.09
ICICI Pru Advisor-Very Aggressive (G) 3.6 0.3 8.9 9.2 9.4 17.2 7.06 0.07
Kotak Equity FOF (G) -6.2 -14.3 3.3 6.1 8.1 18.1 8.31 0.06
Overseas Equity Oriented FoFs
DSPBR World Energy-Reg (G) -17.2 12.0 0.2 - - 1.8 5.13 -0.03
Mirae Asset China Advantage-Reg (G) -9.4 -1.1 - - - -1.1 5.06 -0.04
AIG World Gold (G) 5.6 20.6 26.0 24.7 - 16.1 9.93 0.17
ICICI Pru Indo Asia Eq-Ret (G) -5.8 -3.8 5.6 6.0 - -0.8 8.22 0.04
Principal Global Opportunities (G) -2.7 6.7 8.2 3.6 5.6 7.6 7.47 -0.01
Sundaram Global Advt (G) - - 5.1 2.6 - 1.5 7.43 0.01
Kotak Global Emerging Mkt (G) -7.6 0.3 4.9 -0.1 - -2.5 7.90 -0.02
BSE-Sensex -6.4 -7.5 2.3 4.6 7.3 - 9.27 0.02
BSE-200 -5.7 -10.9 2.8 5.0 8.0 - 9.73 0.03

As far as their performance is concerned, most of equity oriented FoFs led by the domestic equity oriented ones have delivered luring returns across time frames and also well managed their risk (as revealed by their Standard Deviation) which thus has resulted in them providing appealing risk-adjusted returns (as revealed by their Sharpe Ratio). However while investing in them, we believe that you should not just get lured by the past performance they have delivered, but also delve a litter deeper to ascertain the following aspects:

√ Investment objective and asset allocation as mandated for investment
√ Track record of the underlying mutual fund schemes in its portfolio
√ Portfolio of stocks and sectors which the underlying funds have an exposure to
√ Investment processes and systems followed by the fund manager while choosing the underlying funds

Also you need to assess the tax implication of investing in a FoF scheme, as this would have an impact on the post-tax returns which you earn on your investments. It noteworthy that FoFs are classified as a debt scheme for taxation purpose (despite investing even 100% of its corpus in equity oriented mutual fund), whereby the short-term capital gains (connoted if holding period is less than 1 year) which one earns is taxed as per the marginal rate of taxation (i.e. as per one's tax slabs)while the long-term capital gains (connoted if holding period is greater than 1 Year) is taxed @ 10% without availing the benefit of indexation, or 20%by availing the benefit of indexation.Moreover, the dividend which one earns (if opted for the dividend option), is subject to a Dividend Distribution Tax (DDT) @ 13.519% (12.5% DDT + 5.0% surcharge + 3% education cess).

Investor Category Short Term Capital Gains Tax
(Period < 1 Year)
Long Term Capital Gains Tax
(Period > 1 Year)
Dividend Distribution Tax TDS
2010-11 2010-11 2010-11 2010-11
Resident Individual / HUF As per Tax Slab 10%
(20% with Indexation)
(12.5% + 5.0% surcharge + 3.0% education cess)
Partnership Firms / AOP / BOI 30% 10%
(20% with Indexation)
(30% + 5.0% surcharge + 3.0% education cess)
Domestic Companies 30% 10%
(20% with Indexation)
(30% + 5.0% surcharge + 3.0% education cess)
NRIs As per Tax Slab 10%
(20% with Indexation)
(12.5% + 5.0% surcharge + 3.0% education cess)
STCG - 30% ^
LTCG - 20% ^
(After Providing for Indexation)
^Plus applicable surcharge and secondary and higher education cess.
(Source: Finance Act, 2011PersonalFN Research)

Hence while the from a taxation angle it may appear a little discouraging, a FoF schemeimbibes in it pros of investing as well which are:

√ Opportunity to create a diversified portfolio of various mutual funds schemes where one can build a portfolio and avail the benefit through:
  • Diversification by fund manager

  • Diversification by style of fund management followed by the funds in the portfolio (i.e. value, Growth, blend, opportunities, flexi-cap, multi-cap and thematic)
√ Reduction in risk exposure due to diversification (as seen above)
√ Research and process of selecting the right mutual fund schemes is taken care by the FoF fund manager
√ Multiple fund managers and mutual fund schemes in the underlying portfolio, helping to reduce the impact of bad performance by any of the fund manager or the fund
√ Reduces hassles such as multiplicity of transactions, filling forms, maintain multiple account statements and tracking multiple mutual schemes - all experienced while investing directly in regular mutual funds schemes .

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. Also 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.

The verdict:

Hence given the aforementioned pros and cons,aFoF 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 resource of 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

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

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.


Equitymaster requests your view! Post a comment on "Fund of Funds - Building your portfolio the efficient way!!". Click here!


More Views on News

The Right Financial Advisor Is Around the Corner (Outside View)

Mar 10, 2016

An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

Why financial planning should be dull and boring (Mutual Fund Corner)

Feb 29, 2016

Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

What Are E-Wallets And How To Use Them (Mutual Fund Corner)

Feb 12, 2016

PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

Is Consumption Boom Over In India? (Mutual Fund Corner)

Feb 2, 2016

Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

Feb 1, 2016

Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

Aug 4, 2017

The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms