With eleven categories of mutual funds and over 350+ mutual funds in the market, the task of selecting the best equity mutual fund can be cumbersome and confusing. The standard approach that many investors use is to select among the top-ranked or top-performing mutual funds. However, there is a fault in this approach due to the following reasons:
1. Rankings are transitory: The top-performing funds of today may not be among the top tomorrow.
2. Skewed Equity Allocation: Investors may end up buying similar equity schemes without clear diversification and leading to a skewed equity allocation.
3. Expenses on rebalancing: When rebalancing one’s equity allocation according to the market conditions, it can lead to exit loads, additional expense ratio and taxation, decreasing the investment corpus generated.
4. Reviewing multiple funds: Investors would need to spend time and go through the hassle of tracking and reviewing multiple funds. This would also involve additional paperwork.
5. Insufficient research: It is not easy to track the consistency of returns and the quality of the fund management team, etc.
To eliminate all these hassles, there is a category of mutual funds that simplifies the fund selection process that is the Equity Fund of Funds.
What is an Equity Fund of Funds?
According to SEBI categorization of mutual funds, Fund of funds are mutual fund schemes that invest in the units of other schemes of the same mutual fund or other mutual funds. An Equity Fund of Funds invests in equity mutual fund scheme after quantitative and qualitative analysis amongst other parameters.
What are the Qualitative & Quantitative Parameters?
Quantitative Parameters: Evaluating historical returns could be the starting point for the analysis of mutual funds. Since mutual funds are market-linked, historical returns may or may not be indicative of future performance.
The quantitative parameters could include the performance across tenures and against the benchmark.
- Evaluate the performance over longer tenures like 3, 5 and 10 years and check for consistency of performance and against the benchmark.
- Also, check the portfolio concentration levels and whether the portfolio is diversified across different asset classes, stocks, sectors, or geographies.
- Assess the portfolio churn levels; if the portfolio is churned many times during a year, the fund will incur higher transaction costs, impacting the future value of investment.
The qualitative parameters include:
- The quality of the fund management team,
- The investment systems and processes,
- The fund management philosophy and
- Whether the total mutual funds managed by him do not exceed 5.
Based on the above parameters, the fund manager of Equity Fund of Funds Scheme shortlists a portfolio comprised equity schemes with a good track record.
What are the advantages of Equity Fund of Funds?
1. Efficiency of Taxation: Over the long term, an equity fund of funds offers better post-tax returns since such funds are taxed like debt funds with long-term capital gain tax at 20% with the benefit of indexation. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. This will effectively bring down the taxable income.
2. Ease of portfolio tracking: Instead of going through multiple funds and their performance, the investor needs to track just one mutual fund and one NAV.
Well-researched portfolio: Investors receive a well-researched portfolio with a proven track record.
Equity Fund of Funds offers a simple way yet comprehensive way of entering the equity market. Those contemplating on the best equity mutual funds can simplify their fund selection with the diversified equity portfolio that an Equity Fund of Funds provides. Investors can use an SIP mode of investment with a ticket size as low as Rs. 500 to invest in 7-9 well-researched diversified equity funds.
Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
