Kotak Mahindra Mutual Fund has launched India's first true Fund of Funds (FoFs) - Kotak Equity FoF. By true we mean a FoFs scheme which will invest in the schemes of other AMCs also. At the moment, the FoFs from fund houses like Templeton, Birla and Prudential ICICI invest in their own schemes only.
As the name suggests, Kotak Equity FoF will be a pure equity FoF with 75 per cent of the portfolio comprising diversified large-cap schemes (at least 3 schemes) and the remaining 25 per cent in diversified aggressive schemes (at least 2 schemes). The equity scheme of the AMC itself will under most circumstances form 20 to 25 per cent of the FoF's portfolio. This FoF is benchmarked against S&P CNX Nifty.
Kotak Mahindra Mutual has designated Kotak Securities to be the agency for determining the universe of eligible funds for the scheme to invest in. In order to find a place in the universe of possible schemes, a scheme should be floated by an AMC which has total assets under management (AUM) of more than Rs 5,000 crore and equity AUM of more than Rs 500 crore. The scheme should have been in existence for at least a year and should have total assets of more than Rs 50 crore. Moreover, Kotak FoF will not invest more than 25 per cent in any particular scheme.
Just like other FoFs, Kotak Equity FoF will also charge an expense ratio of 0.75 per cent. Since most AMCs have waived off the entry load for FoF investment, this FoF would not charge any additional entry load. Kotak Equity FoF has kept the entry load at 2.25 per cent irrespective of investment amount.
The biggest advantage of any FoF is the tax benefit. As FoF is also a mutual fund scheme, it does not have to pay capital gains tax on its trading activities. Thus tax efficiency on account of rebalancing is higher than if one followed a do-it-yourself approach. There is also the issue of control over your investments. One of the drawbacks of mutual fund investing is that you are not in-charge of your investments. Thus at times funds can have high cash holdings and nothing can be done about this. In the fund of fund scenario, this situation could be acerbated as two levels of fund managers will control the portfolio and so there could be more unintended consequences. Of course one would expect the FoF manager to take cognizance of any such situation and deal with it.