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Playing catch up

The advantage of direct plans is well documented by now. Yet the Fund of Fund scheme universe is still to fully adopt this route and benefit...

The 30-fund universe of Fund of Fund (FoF) schemes is facing a different challenge since the advent of direct plans. The virtues and savings when investing in the direct plan of mutual funds is immense, yet not all FoFs have moved the direct way. At the moment, there are 30 regular India-oriented FoF plans, across different categories of equity, debt and hybrid funds and account for Rs 1,919 crore of net assets.

At present only 12 FoFs, managing assets worth Rs 227 crore, invest their entire corpus into direct plans of the underlying funds in the FoF. However, three big AMCs -- Franklin Templeton, ING Investments and Kotak Mahindra, which manage Rs 1,686 crore are yet to start investing in direct plans. There are several reasons for this oddity such as lack of substantial fresh flow into these schemes which is hindering the schemes to invest in direct plans. The reduced expense when investing in direct plans adds significantly to the long-term returns of a fund scheme and it is important that AMCs demonstrate the cost saving with direct plans, especially in FoF, where they can easily demonstrate this virtue.

Why the dilemma?
• Although there is no short-term capital gains tax to be paid by a mutual fund, applicable exit loads and STT may be preventing them from moving existing assets
• The lack of incremental fresh investments could be case for funds not making the shift, for instance, three of Franklin Templeton's 6 FoF schemes received a net inflow of only Rs 82 lakh between January and March 2013 which is miniscule compared to its FoF AUM of Rs 1,331 crore
• Switching out of an equity-oriented mutual fund holding of FoF schemes earlier attracted 0.25 per cent STT, which has gone down to 0.001 per cent from June 1, 2013. Many FoF may move to direct plans in June.