Fund of Funds : Indian MF Markets

MFs serve in meeting life goals by relating the savings needs & risk appetite through Fund of Funds as a single shot investment. All requirements of differing risk levels (return goes hand in hand as you know) are met by dividing the investment into component schemes at entry.The savings needs of an individual are linked to his life goals as follows:
1. Accumulation phase
2. Consolidation phase
3. Spending phase and
4. Gifting phase

In the accumulation phase one is planning to meet his life goals like acquiring a higher qualification, buying a car, buying a house etc..
In the consolidation phase, he has met one or two of the goals or nearing the achievement of these goals. So he makes a rationalisation of all his investments. Re groupe it according to attainment of goals/new goals set.
Spending Phase is characterised by spending for higher education of the child/marriage of the child etc.. One is almost self sufficient in this phase.
In the gifting stage, he spends for charity or social works as he has lot more left after providing for his current & future well being.Fund of Fund normally builts these aspects normally either by way of age/risk level classifications.

FT India Life Stage fund comprises of 5 options connecting age as a proxy for risk level. Pru ICICI, Birla AMCs has risk level as its bas for classification.

The Optimix from ING Vysya group has five FOFs with themes:
Income/Growth,
Financial planning,
Active Debt Management,
Good value equity, and
Asset allocation.

It is interesting to note that, schemes like ALL season's Bond Fund of Standard Chartered (Grindlay's SCABF) invests only in first class bond funds only. Kotak dynamic equity Fund also invests in other MF schemes.

Basically, fund of funds invest in MF schemes. It can be from same fund house or outside or in any combination as provided in the OD. A normal fund cannot invest in FOF as also another FOF. SEBI requires to keep the fund expenses to 0.75% of AUM.

The important feature is that the component schemes are managed independently and therefore the risk level is maintained same all throught the life of the investment. Diversification across strategies/styles are captured well by the FOFs.

For the original version please read the Business Manorama dated 19th March 2007