Anupam: Hi listeners, we at Aditya Birla Sun life Mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realize your investment goals.

Hi, I am Anupam Gupta, B50 on twitter and in this episode, we are going to discover the recipe behind ‘Fund of Funds’ from our guest chef Mr. Vinod Bhatt who Heads Investor Communication at Aditya Birla Sun Life Mutual Fund. Vinod Welcome to the show! Tell us something about yourself.

VINOD: First of all, thanks Anupam for having me here just should tell you quickly about my background. I also look at macro and equity strategy piece. I have been with the Aditya Birla Group for the past seven and a half years and before that worked in USA for a bit and by education, I am an engineer with an MBA in Finance.

Anupam: Fantastic! I believe that you are a Level 3 CFA as well.

VINOD: Yes.

Anupam: Fantastic wish you All the Best for the exams!

VINOD: Thank you!

Anupam: Okay Vinod let’s get into the topic Fund of Funds right because I have heard of so many different types of mutual funds, this is a really interesting category let’s tell our listeners the basics and what exactly does a Fund of Funds address for them.

VINOD: So, you know investors typically will invest directly in stocks or maybe in mutual funds or in ETFs right. A Fund of Funds essentially, it’s an open-end fund which invests in other mutual funds and ETFs. So, what happens is the investor will invest in one Fund of Fund and Fund of Fund will then invest in suitable mutual funds and ETFs right so that essentially is the main difference between fund of funds and a normal mutual fund. The other is that fund of fund does not directly invest in stocks it only invests in mutual funds and ETFs right. Now in terms of how it works. A fund of fund may invest for example let’s say 45% of an investor’s corpus in equity, 45% in debt and maybe the remaining 10% in gold or liquid funds right. So, it essentially does the diversification and asset allocation for the investor which normally for example, a financial planner would do so fund of fund product does the job of a financial planner. Now in terms of benefits for the investor you know while mutual funds are very convenient vehicle to invest you know it has become much more complex for investor so there are multiple categories lots of funds to choose from and we saw that recently even SEBI came out with a recategorization of schemes tried to simplify things for investors. So, the first benefit of the fund of funds product is that the investor doesn’t need to worry about the complexity in the paperwork that’s all taken care of by the portfolio manager of the fund of funds. So, all the investors does is invest in one fund of fund and then he does not need to worry about anything. So. that’s just one NAV and one folio to track. Right that’s the key benefit.

Anupam: OK, Vinod so that explains the basic contours and shapes of a fund of fund right and it sounds like a really interesting product. I think there are what somewhat three, three and a half thousand different types of mutual fund schemes right. I mean within equity there are all kinds of large cap, small cap, mid cap in debt there is short term, long term I don’t know so you know the fund of fund seems to be ideal for someone who doesn’t want to go through all of this just invest into something that has a stake in all of these right. This brings me to the next question that what are the different types of fund of fund right are there different types or are there different investor profiles. Like If I am someone who is 25 years old if I am just starting my job and I want to have if I want to invest for a long term or if I want to, I am someone who is 35 or I am 45 so as per the age my financial goals are different. So, how does a fund of fund address different goals?

VINOD: Right so like I mentioned fund of funds product does the job of a financial planner for the investor and financial planning starts by defining the goal of the investor right. Hence the categories of the fund of fund are tied to the goals of the investor. So, we have for example an aggressive category, a prudent category and a conservative category. An aggressive category will be for somebody who is like you mentioned 20-25 years old who has a long time horizon and who has a higher risk appetite whereas a conservative category will be for somebody who is maybe 45 years old and doesn’t want to take so much risk and prudent category comes somewhere in between right so that’s broadly on the category front but also we need to keep in mind who is this product catering to right so a fund of fund may not be necessarily be meant for example a high net worth individual or an investor who already is aware of equities and different kinds of funds right. Its more geared to for example a retail investor who is coming into the markets for the first time who is looking at okay you know which assets do I need to invest in. You know who may, have a limited corpus right so, you can start an SIP in fund of fund with even a thousand rupees for example and that gives exposure to the fund managers and the best performing funds which normally wouldn’t be able to get on your own right. So, that’s the advantage for the fund of fund structure and especially if investors are living outside the metros, they don’t have access to financial planners, they don’t have the necessary knowledge. So, fund of fund is the ideal kind of product for these types of investors.

Anupam: Okay sound really interesting right. Because we are taking care of two very important aspects of financial planning right that’s diversification and asset allocation right. So, lets get into that lets get into the concept of asset allocation. How exactly is it taken care of by the fund of funds and then you know a very obvious question is how I can do this myself so, what exactly does a fund of fund do that makes my life better?

VINOD: Definitely, so you know like I said what a fund of fund product does is it gives access to the investment managers you know in the business right. So, if I am an investor who has a few thousand rupees to invest a month I invested in a fund of fund product and then you know its pulled together and the portfolio manager essentially decides how to allocate that corpus and for example you know he can evaluate equity mutual funds, debt mutual funds or maybe liquid funds or even gold ETFs for the matter and the way that allocation works is based on for example it might be on the current market evaluations current market expected conditions and so on right so if the market is overvalued then the portfolio manager will shift the corpus more from equity towards debt and vice versa. So, asset allocation is taken care of in that way and typically even within equities for example like in Vinod there are different kind of equity funds so maybe you can have 40-50% in large cap funds and the remaining corpus in maybe multi cap or thematic funds right even in debt there are different kinds of funds. So, the portfolio manager takes care of the asset allocation on that basis. Now in terms of why its better than an investor doing it themselves. Now what he have seen typically is you know investors are influenced by lot of behavioral biases right. So, for example we saw in 2018 the markets didn’t do well a lot of investors will panic and they will get out of the at the wrong time and they will wait till the market comes back and get in the market at the peak that’s exactly the opposite of what they need to do right so, having a established portfolio manager who knows what he is doing who knows the market conditions doing the investment for the investors I think you can’t have things better than that right. So, fund of fund as a unique buy and sell discipline built into its structure which gives advantage to the investors.

Anupam: Okay Fantastic so, the next question that becomes a process right because there are so many different mutual funds out there just like an equity mutual fund has to choose between 3-4000 stocks. I am sure a fund of fund manager has to choose between a whole variety of different funds within a certain category and across certain categories. Right so, tell us something about the process.

VINOD: Yes so, like I said you know the fund of funds invests in mutual funds and ETFs. It doesn’t invest directly in stocks right so, that implies that you know there’s not a lot of churn that happens in the fund of funds similar to what you may see in a mutual fund right so, typically the portfolio manager will do a monthly review of the portfolio right so, he will be tracking the portfolio regularly but its not churn that often so, for example in a monthly review you will look at okay how are different funds performed in the large cap category for example in the mid cap category or in the thematic category. You will comply the performance across the peer set with the benchmark you will see how the funds are positioned for the expected market conditions and based on that on a quantitative analysis the portfolio manager will filter which funds are the performing funds which are best positioned that’s on the quantitative side on the qualitative side the portfolio manager looks at for example the track record of fund managers their style and their consistency right. Do they change their style when market conditions change so, that’s on the qualitative part so the portfolio manager typically takes a mix of the quantitative and qualitative analysis to decide which funds to invest in right so, that’s much better than an investor doing this who may not have the necessary knowledge who may have some behavioral biases and gets influenced by like non important factors.

Anupam: Okay Vinod so, this sounds like a lot of effort for the fund manager right because he is constantly looking at evaluations, he is constantly looking at how the market moves and then taking a call on what to invest what to ignore right. So, there is, and you mentioned a monthly review also so, I am guessing that there is a lot of rebalance happening. Okay so, two questions first is that how frequently does the rebalancing happen in a fund of fund. And second honestly how do you benchmark right because if I have an equity scheme then I know clear cut if it’s a large cap it’s a NIFTY if it’s a mid-cap it’s something else if its debt there’s a benchmark. How does benchmarking work in a fund of fund.

VINOD: Sure so, lets start from the rebalancing front like I said we try to keep the churn to a minimum in the fund of funds structure right so, although we track the portfolio almost daily but formal review happens let’s say once a month and based on that you decide okay which funds to maybe sell and which funds to buy right. Now one thing to keep in mind is that when you know there is a exit load that all mutual funds have even for a fund of funds if they exit a mutual fund they need to pay that exit load and we try to keep the churn to a minimum. But if we find a better investment opportunity or if a fund is not doing well then, we have to take some action. So, that’s why the rebalancing comes in and also between the asset classes right so, if markets are overvalued then shift from equity to maybe debt or liquid or gold and so on that’s how the rebalancing works. Now the important point to note here is like you mentioned the benchmark. Because the fund of fund invest in different asset classes there is no single benchmark like you know for the large cap there is NIFTY but for the fund of funds it’s a mix of for example there is an CRISIL index which is you know 50% equity 50% debt kind of an index but even that is not enough because you may have gold in the portfolio right so, you need to create a benchmark almost on your own we should track the performance of the portfolio again and again what is important here is the consistency so, for example for the aggressive fund of fund once you define the benchmark then you can’t change the benchmark you know that it wont be fair for the investors so, the aggressive fund you may have a different benchmark for the prudent fund of fund you may have a different benchmark and same thing for the conservative fund.

Anupam: Okay so, are these benchmarks made internally by you?

VINOD: So, SEBI does give some guidelines so, for example for the aggressive CRISIL Index is a 75% equity 25% debt for the conservative it’s other way round so, you know what benchmarks to use you can’t use any index that you want yeah.

Anupam: Ok, there is a fund that is buying other mutual funds how does the costing works for me as an investor?

VINOD: Right so, it’s a very important question there was a concern earlier among investors that is the fund of funds imposing a double year of expenses right so, you have an expense at the fund of fund level and you also have an expense at you know the mutual funds in which fund of fund is investing. So, when the SEBI came out with a recategorization they also have come up with a cap at the total expenses whether it’s a mutual fund or whether it’s a fund of fund right so, now there is a cap on the expenses so, irrespective of the funds that the fund of fund invest in it can’t charge the investor above a certain limit. The other point to note is that for example if our fund of fund invest in house mutual funds then its not allowed to charge fund management expenses so that kind of reduces the expense for the investor and the third is you know the fund of fund always invest in a direct manner in the mutual fund right not the regular one so, again the costs are reduced. Right so, from these angles kind of the cost concerns have somewhat been mitigated.

Anupam: Okay Vinod as we wrap up the show is there you know one takeaway for listeners maybe you just mention as to who this is targeted for?

VINOD: Definitely I think the fund of funds would be an ideal product for the retail investors you know who are starting of in their investments and maybe who have limited capital to invest right so it gives you an opportunity to access the fund managers with limited capital with the fund managers in the industry taking care of your asset allocation you know and you don’t need to even go to any financial planner so, kind of a lot for people are intimidated by the markets or talking to financial planners so, this takes away all their concerns and I think it’s a perfect product for retail investors.

Anupam: Okay and if listeners want to know more about A) the concepts and B) the products you have then what’s the best place for them.

VINOD: Yes, we definitely have our website where you will get all the literature on the product and there are other videos that can help you.

Anupam:Folks that is a wrap on our show. For more such interesting know how’s continue listening to our Podcast MF 101 or simply follow the blog page of Aditya Birla Sun Life Mutual Funds, Bloomberg quint, IBM podcast or wherever you get your podcasts from. If you have any queries or some specific subjects you want us to talk about, with regards to mutual fund investments, reach out to us on our Twitter handle @abcabslmf. That’s @abcabslmf Thank you for listening to this podcast!

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The views and opinions expressed herein are personal and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). ABSLAMC/ the Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.”

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