VR Logo

HDFC MF Plans FoFs

The concept of Fund of Funds (FoFs) is gaining popularity. A few months after Kotak launched its FoFs, there is another potential entrant in the arena--the HDFC Mutual Fund

The concept of Fund of Funds (FoFs) is gaining popularity. A few months after Kotak launched its Fund of Funds that could invest in schemes of other mutual funds, there is another potential entrant in the arena--the HDFC Mutual Fund.

The asset management company (AMC) has filed an offer document with the Security and Exchange Board of India (SEBI) for the launch of HDFC Multi Manager Fund, an open-ended Fund of Funds scheme.

On offer are four plans, including Multi-Manager Income Plus Plan, Multi-Manager X-tra Income Plus Plan, Multi-Manager Balanced Plan and Multi-Manager Aggressive Plan. These plans would invest in underlying schemes of HDFC Mutual Fund and/or other mutual funds registered with the SEBI inline with their investment objectives.

The schemes will cater to different risk profile of investors as the amount invested in equity-oriented schemes would differ. HDFC Multi-Manager Income Plus Plan will invest only 10-30 per cent of its corpus in equity-oriented schemes, Multi-Manager X-tra income Plus will invest 25-45 per cent in equity-oriented schemes, while the Multi-Manager Balanced Plan would invest 45-65 per cent in such schemes. Multi-Manager Aggressive Plan will take the maximum risk and would invest 70-90 per cent in equity funds.

A weighted average of Sensex, Crisil Composite Bond Fund Index and Crisil Liquid Fund Index would be used as a benchmark. The weightages would differ depending on the plans.

The fund has laid out the following criteria for selection of the schemes:

1) For investment in equity oriented schemes:
a) The recommended scheme should have a minimum three-year track record.
b) The recommended scheme, which has on immediate preceding month end, a corpus of Rs 100 crore or more.
c) It does not charge the entry or exit load to the scheme at the time of investment.
d) Investment by the plan under the scheme will be limited to 10 per cent of the net assets of the investee scheme at the time of reallocation.

2) For investment in debt-oriented schemes the following criteria has to be satisfied:
a) Portfolio Characteristics: Emphasis on credit quality of underlying portfolio, broad asset allocation of the scheme, liquidity of the underlying assets, diversification of the portfolio and interest rate risk management of the fund.
b) Performance track record (both long-term and short-term performance against the stated benchmarks) along with risk adjusted returns of the scheme.
c) Expense structure and load structure of the funds.
d) Size of the scheme and volatility of the corpus of the fund--this enables ease of transaction and low impact cost of portfolio re-allocation.

Advantages of FoFs
One of the obvious advantages of FoFs is on the tax front. Portfolio rebalancing via the Fund of Funds route will attract no capital gains tax. Additionally, after you have invested in a Fund of Funds, the fund manager has to make the effort to track the individual funds and rebalance the portfolio towards better performing funds. This ensures that the investor does not have to hold a variety of funds in his portfolio and spend his time in tracking each fund on an individual basis. However, this would not benefit investors who already hold a slew of funds similar to those held by the Fund of Funds in their portfolio.

The drawback is that the investor takes on higher expenses if he invests in a Fund of Funds. SEBI allows Fund of Funds to charge a recurring expense subject to maximum level of 0.75 per cent. This would lower the returns for the investors.