17 October, 2007

Kotak Equity Fund of Funds: Two tier diversification

Here is a genre of funds for those investors who would like to diversify across sectors and at the same time aspires to gain from the expertise of more than one leading fund manager's unique style and strategies.
Kotak Equity Fund of Funds is one such scheme. Launched in July 2004, the fund has a stated objective of generating long term capital appreciation from a portfolio created by investing predominantly in open - ended diversified equity schemes of mutual funds. Kotak Equity Fund of Funds is a multi manager FOF scheme that invests 90%-100% in diversified equity schemes and rest in liquid schemes. The scheme invests across multiple fund houses, which invests 65%-75% of their portfolio in diversified large cap schemes and 15%-25% in diversified aggressive equity schemes. The essence of the fund is to build a compact portfolio by reducing the number of funds an investor needs to manage, while not compromising on diversification and at the same time providing good opportunity and return for the long term investment.
By investing in Kotak Equity FOF, investors are not restricted to the schemes within the fund house and do not lose out on opportunities to invest in better performing funds vis-a-vis its peers in the same category. The risk levels associated with such holdings are even lower than those of conventional mutual fund schemes. Above all, the cost of investing reduces significantly for an investor as she benefits by saving on the frequent entry or exit costs, short/long-term capital gains tax when a Fund of Fund re-jigs the portfolio allocation.
However, Fund of Funds as a category suffers from one distinct disadvantage when it comes to the tax regime. Equity oriented schemes under this category do not qualify for the capital gains tax benefits normal equity oriented funds are able to get. Showing concern for this anomaly on tax structure, Sandesh Kirkire, CEO, Kotak Mutual Fund said that non- availability of tax benefit is one of the reasons why this type of funds is not growing that rapidly in India.
At the same time, he expects government to soon take some action and provide a level playing ground. The fund has performed on par since inception registering a return of 41.82% as against benchmark (S&P CNX Nifty) return of 40.52%. However, the fund's return for the last one year has been on the lower side under-performing the broad indices and in this respect it is well behind the leaders in this category.
However, for the last one month it has outperformed its peers like ICICI Prudential Aggressive Plan - Growth and FT India Life Stage Fund of Funds The 20s Plan - Growth, reporting a return of 6.64% better than the category median of 5.64%. The fund has reported a decline of 26.06% in assets under management to Rs 719.50 million as at March 2007 from the previous year's level of Rs 907.03 million.
Looking at the current volatility in the equity markets the fund manager has increased its cash component to 2.26% from 1.85%. The portfolio of the scheme is well-diversified across seven equity based schemes. Kotak 30, Birla Sun Life Frontline Equity Fund, HDFC Growth Fund, Reliance Vision Fund and Prudential ICICI Dynamic Plan are the top five holdings, which contribute 82.23% to the total portfolio.
software services, capital goods, telecom and banks are among the top sectors in the overall portfolio of mutual funds held by Kotak Equity FoF. Following the trend in the market the fund manager has changed its scheme allocation of fund. In the last three months, the fund manager has added Reliance Vision and Magnum Global to the portfolio and dropped HDFC Top 200 and Franklin India Flexi Cap Fund.
Considering performance and varying market conditions the fund manager keeps on adding and reducing schemes like Birla Midcap Fund and HSBC India Opportunity Fund in its portfolio kitty. Looking at the overall portfolio it is diversified across large number of sectors providing investors the benefit of two-tier diversification.