The Hindu Business Line : Know about fund of funds

A FUND of funds (FoF) scheme is a mutual funds scheme that invests in other mutual funds schemes rather than in securities. Such schemes are prevalent in international markets, and can have different investment patterns and strategies as disclosed in the offer documents. Investors may park their funds in those FoF schemes which, they think, meet their investment objectives rather than in different schemes of a mutual fund and then keep track of their NAVs.

FoF schemes may invest in other sector-specific schemes or those in which there is more weightage of certain stocks and from which they can exit when the growth prospects of the sectors weaken. Investors putting their money in a sector-specific scheme may not be able to decide when to exit.

Regulatory requirements

At present, SEBI (Mutual Funds) Regulations restrict investment in other mutual fund schemes (under the same management or another mutual fund) up to 5 per cent of the net assets of the mutual fund and prohibits charging of management fees on such investments. In view of these restrictions, a mutual fund cannot launch an FoF scheme.

Earlier, mutual funds had a small number of schemes and, hence, the concept of FoF was not very feasible. Over the years, almost all mutual funds have launched a number of schemes and it is now possible for them to start FoF schemes as well.

It is also likely that an FoF scheme may prefer to invest in the mutual funds schemes of other mutual funds subject to disclosures in the offer documents.

Following discussions with the Association of Mutual Funds in India (AMFI), certain restrictions on FoF schemes have been proposed:

An FoF shall not invest in another FoF;

An FOF shall invest its entire net assets, barring the funds required for meeting the liquidity requirements for repurchases, in other mutual fund schemes as disclosed in the offer documents; and

A mutual fund scheme shall not invest in an FoF scheme.

Expenses and management fees

Regarding recurring expenses and fees for FoF schemes, one suggestion is that the fees and other expenses charged by other mutual fund scheme(s) (in which the FoF is investing), together with the management fee and expenses charged to the FoF scheme, should not exceed the total limits on expenses as prescribed under Regulation 52(6).

The rationale behind this suggestion is that the mutual fund schemes in which FoF scheme invests are already charging expenses and fees as specified under the Regulation. Another suggestion of the mutual funds industry, of monitoring and keeping a track of the expenses of FoF and other mutual funds schemes on daily basis, would be very difficult to implement.

The view is that an FoF would have marketing and distribution expenses and would like to charge management fees, as it is providing a service to investors. It has been suggested that a maximum limit of 0.75 per cent of expenses, including management fees, should be allowed in the case of FoF schemes. Within this upper limit, mutual funds can charge expenses depending on the market condition.

They would also disclose in their offer documents, and in advertisements for FoF schemes, that investors are bearing this expenditure in addition to expenses of other schemes in which the FoF invests.

(Source: www.sebi.gov.in)

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