Mirae Asset Equity Allocator Fund of Fund NFO: Exposure to large- and mid-cap ETFs

The new fund offer (NFO) of Mirae Asset Equity Allocator Fund of Fund is open until September 15.

The scheme seeks to invest in the Nifty 50 ETF (exchange-traded fund) and the Nifty Next 50 ETF of Mirae Asset Mutual Fund and in the Midcap 150 ETF of either Nippon MF or ICICI Prudential MF to begin with (as Mirae Asset MF does not have its own ETF in this category).

The fund will be benchmarked against the Nifty 200 Index (TRI).

Fund strategy

Different segments of the market could perform differently at any point in time. With a view to capture the best of the performance across certain market capitalisations, the fund aims at a valuation-based asset allocation within such segments.

The segments are represented by the Nifty 50 TRI, the Nifty Next 50 TRI and the Midcap 150 TRI. The choice of these indices gives the fund a large- and mid-cap bias.

Siddharth Srivastava, Head - ETF Product, Mirae Asset Investment Managers, explains: “The base allocation among the three ETFs will be the representation of the three indices in terms of their free-float market cap.

“For instance, the Nifty 50 captures around 75 per cent of the large- and mid-cap segment while the Midcap 150 index captures around 13 per cent.

“So, right now, if valuations are perfect, the allocations to the three underlying ETFs will be somewhat in the ratio of 75: 12:13.”

The allocations will be changed from time to time after taking into consideration the current, future and historical market valuations. If the valuation changes above a desired threshold, the allocations will be tweaked.

There is room for a range-bound deviation in allocations to the underlying ETF based on valuation. However, even when doing so, the fund will retain its large- and mid-cap focus.

Our take

The NFO finds a peer in ICICI Prudential Passive Strategy Fund, a fund of fund investing in four different equity ETFs. ICICI Prudential Passive Strategy is also benchmarked to the Nifty 200 TRI. It enjoys tax treatment as an equity fund. Mirae Equity Allocator, too, will be treated as an equity fund for tax purposes.

The underlying schemes of the ICICI fund though are different from Mirae’s. As per the former’s August portfolio, it holds one-third of its assets in ICICI Prudential S&P BSE 500 ETF, about a quarter each in ICICI Prudential Midcap 150 ETF and ICICI Prudentil Nifty Low Vol 30 ETF, and about 14 per cent in Bharat 22 ETF. Hence, it is not a direct comparable. Over one-, three- and five-year periods, ICICI Prudential Passive Strategy has underperformed the Nifty 200 TRI by 3-5 percentage points.

Coming to Mirae Equity Allocator, there are three points to note. One, the low-cost structure of the product. The total expense ratio (TER) of the product will be 20 basis points for the direct plan and 30 basis points for the regular plan, including the cost of the underlying scheme.

TER of actively managed large-cap funds are 1.75-2.75 per cent for regular plans and 0.62-2.38 per cent for direct plans.

Two, since the scheme operates in a fund-of-fund structure, investors can take the SIP route; there is no need for a demat account. Three, since the fund will invest in ETFs, the downside could be lower than that of actively managed large- and mid-cap funds. At the same time, the upside could also be capped, though the fund seeks to provide ‘nominal’ alpha through the changes to asset allocation.

Having ETFs as the underlying, the scheme may suit investors with a lower risk appetite. But the rules for allocation and changes therein, seem complicated. One can wait and watch for the fund’s strategy and performance to play out. The fund is open-ended and will reopen for subscriptions after the closure of the NFO.