MFs agree to load rider for fund of funds

Mutual funds have privately agreed that investment by a fund of funds (FoFs) in the scheme of another fund will not attract any loads, provided the investment is direct and not through a distributor.

Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds. The funds are designed to achieve even greater diversification than traditional mutual funds.

Industry circles said the agreement has been arrived at in view of the large number of fund of funds which are being launched. Birla Sun Life Mutual Fund had, a couple of months back, introduced an asset allocation scheme, which is actually a fund of fund investing in other schemes.

Thus far the agreement is with respect to equity schemes and nothing has been specified about debt schemes, though it is expected that the no-load stipulation will be extended to such schemes as well.

At present, there are only a handful of fund of funds available and most of them invest in schemes launched by their own fund houses.

There were issues of clarity of whether load should be charged or not and owing to this many fund houses were not very keen on allowing schemes to invest in their funds. If the funds in which the FoF invests also start charging loads then the investors will have to bear the brunt of a double load.

Apart from Birla, there is the FT India Dynamic PE Ratio FoF, FT india Life Stage FoF, Prue-ICICI Advisor FoFs which invests in its own equity and debt schemes, and DSPML's Savings Plus FoFs.

The FoFs, while giving lower returns than a pure equity or debt fund, still offer returns of up to 4 per cent and are less riskier since they have a much more diversified portfolio.

FoFs are usually further sub-categorised into moderate, dynamic and aggressive, depending on the kind of schemes they invest in. An aggressive equity FoF would be investing in pure growth schemes.