Let Us Diversify Your Equity Mutual Fund Investments

Equity investments seem to be coming back in vogue with the so called animal spirits rekindled. In order to fulfill this growing hunger of retail investors and shed away their feeling of being left out, the tigers are back on the street. Mutual funds are back to promoting their equity offerings as if it`s now or never.

I completely agree with the necessity of having an equity allocation and the role it would play towards long term wealth creation. However, Investors need to tread with caution while going for such aggressive calls, maintain their asset allocation mix and importantly select their mode of investment carefully. It is very important for investors to select a fund with long term track record, a well defined process and predictable returns. In turn, the mutual fund houses need to hand hold the investor by providing them with a suitable fund and avoid disservice by making them prey to their marketing gimmicks.

Mutual funds were born to manage a collective pool of assets of retail investors who usually lack time or skill to handle their own investments. Every mutual fund needs to work towards the betterment and well being of investors. I see a step missing in this direction. Most of the fund houses emphasize the importance of diversification to investors but have ignored to take it seriously enough. Mutual funds have over years launched a plethora of products but have missed providing an offering that would provide enough diversification in the investor’s equity allocation.

A good mutual fund house will have an established research and investment processes in place that helps them deliver a good long term track record. An honest fund house will also advise for diversification not only across asset classes but within the asset class as well. This would entail advising investor to limit their allocation to their own fund house. Combining the above two points is what delivers an important equity offering called the equity fund of funds. With the ability to identify the key processes needed to build a good equity portfolio and to offer investors with a diversification for their equity investments, a key offering from mutual funds should be an Equity Fund of Funds product. However, surprisingly, we only have 3 such offerings as compared to more than 350 equity related funds available.
(Source: Bloomberg)

What’s the likely reason for that? In the distribution driven system of mutual fund sales, there could likely be a feeling that why should I put time, effort, resources and money (by way of commission) and give it someone else for managing. It seems that really doesn’t make sense for them from their business perspective. However, it really makes immense sense from an investor’s perspective.

A concept where the investors give money (invest) to someone who understands the business and has in-depth knowledge of what it takes to generate a long term capital appreciation. This manager with his skill sets invests with other managers who he thinks have the processes set up to deliver outstanding risk adjusted returns over the long term. Isn’t that a credible way to put your hard earned savings to work?

Truly speaking, Equity Fund of Funds is a great product for investors who want to be in equities but are besieged by the wide array of choices to gain from the long term potential of equity investments. Equity Fund of Funds is an equity oriented mutual fund scheme which invests in other diversified equity schemes. So it is an equity fund which invests in other equity funds. A Fund of Funds!

Is it all good with Equity Fund of Funds, are there any negatives?

This product is in conflict with the many mutual fund advisors as they do not get to advise you on mutual fund schemes for you to invest in and keep pocketing a sum on each advice and churn they generate from your investments. The small disadvantages are exaggerated to protect their turf.

An additional expense of this fund over and above the underlying funds expenses is the biggest drawback of an Equity Fund of Fund product, they say. The additional expense charged by the fund should be lower like for Quantum Equity Fund of Funds* is 0.50% p.a. This fund invests in direct plans which have a lower expense ratio as compared to regular plans which are generally offered by advisors. There is considerable saving on account of this which to an extent compensates for the additional expense. Also, investors should not mind paying a small expense for the expertise and research provided by the fund manager / fund house offering an Equity Fund of Fund.

The other drawback is that the taxation of an Fund of Fund product is like that of a debt scheme. This means that long term capital gains are taxed at 10% or 20% with indexation whichever is lower. So long term capital gains arising out of investments in Equity Fund of Fund will be charged at a maximum rate of 10 as opposed to other modes of equity investment which are currently exempt from long term capital gains tax. This would be surprising for readers as much as it is to us. Government authorities need to understand that this is also a form of equity investments; rather a better way for investors to invest in equities and this should also be treated at par with other equity schemes offered by mutual funds. Most of the fund houses do not have this offering and hence there isn’t much representation of this to the authorities for consideration and bring it at par with rationality. With all the hopes on the new government, I also have a right to hope for my investors, that this distortion is done away with in the budget and Equity Fund of Fund be taxed at par with the other equity funds.

However, the point of investing via a fund of funds is the benefit that an Fund of Fund gives is of the expertise, a fund manager strives to select the best funds out of the universe of around 350+ equity related schemes. Not only in selecting but also they continuously track the performance. The professional fund manager can alter allocation of the schemes depending on their performance.

Even then, despite the much flaunted drawbacks to cover the coveted interests, I am of the view that investors should invest in an Equity Fund of Fund to gain their equity exposure because it’s the right way to select the fund managers for their equity investments where they gain from the expertise involved in selecting the right fund managers with strong processes that deliver good long term track record.

The Quantum Equity Fund of Funds offers you a –

•  Diligently chosen long term equity funds portfolio
•  With a well-researched process of scheme selection
•  Well defined process of risk controls on investing
•  An aggregated holding of your investments
•  A one-stop solution for all your long term equity mutual fund investments
•  Fund Investing. Simplified

*Product Labeling

Name of the Scheme This product is suitable for investors who are seeking* Quantum Equity Fund of Funds (An Open-ended Equity Fund of Funds Scheme) • Long term capital appreciation • Investments in portfolio of open-ended diversified equity schemes of mutual funds registered with SEBI whose underlying investments are in equity and equity related securities of diversified companies. companies in S&P BSE 200 index. • High Risk (BROWN) * Investors should consult their financial advisers if in doubt about whether the product is suitable for them. Note: Risk is represented as: (BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk (BROWN) investors understand that their principal will be at high risk

Data Source: Bloomberg

Above article is authored by Quantum.

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