Equity fund of funds are quite common, with both domestic and international options available for investors. Now, Axis Mutual has come out with an ‘All Seasons Debt Fund of Funds (AASD).’ The new fund offer (NFO) opened on January 10, 2020. Although not unknown, a debt FoF offering is rare. The scheme would invest in bond funds offered by many asset management companies and across categories. The objective is to diversify risks and earn reasonable returns over the medium term.
Expanding the investment basket
The fund intends to build a portfolio of debt schemes from across fund houses, by taking into account credit and interest rate cycles. “While constructing the portfolio of this scheme, a top-down approach will decide which category of the bond funds we should allocate money to. After that, schemes will be selected taking into account its portfolio, past track record, size of assets under management, among other factors,” says R Sivakumar, head - fixed income, Axis Mutual Fund.
The investor may benefit from fund manager diversification. The portfolio will be actively managed to reflect the changing trends in interest rates and credit markets.
IDFC All Seasons Bond Fund (IDFCAS) employed this strategy earlier. However, the schemes are from the IDFC funds stable alone. The scheme has invested 60 per cent and 40 per cent of its assets in the house’s banking debt and short term funds, respectively, going by the latest available factsheet. Going through the scheme’s past factsheets, five years ago, it had invested in its super saver income fund – short term plan. A mix of its corporate bond (43 per cent), ultra short bond (32.85 per cent) and money manager (24 per cent) funds was favoured three years ago.
IDFCAS has delivered 7.45 per cent and 7.97 per cent returns over three- and five-year periods, respectively.
The dynamic bond funds category, which aims to make the most of market movements for investors, has delivered 5.15 per cent and 7.13 per cent over same period. So, in IDFCAS’ case, there has been some outperformance.
What works for AASD
In AASD, since a fund manager would make the decision on where to invest, mistakes arising out of focussing on past returns can be avoided, as many investors tend to rush to schemes that have delivered well in recent times.
Also, the fund may help in tax efficient rebalancing of the portfolio. When a debt fund investor switches schemes by selling units based on themes such as falling or raising interest rates before three years, gains would be taxable at his/her slab. But when the same rebalancing is done in a fund of fund, there are no tax implications.
The pitfalls
There will expenses at two levels – charged by the underlying schemes as well as the Axis fund of fund. The returns delivered will be affected to that extent.
Though the Securities Exchange Board of India, the financial markets regulator, has stipulated an overall limit of two percent as expense ratio, there is no clarity on how much this scheme will charge.
Should you invest?
Financial planners ask investors to match their investment time frame with the scheme’s duration. Put simply, if you want to invest for a year, then choose a scheme that invests in bonds maturing in one year – say an ultra-short term bond or low duration bond fund.
“In the case of AASD, the scheme’s investment time frame and investors’ time frame may vary,” says Vishal Dhawan, founder and CEO of Plan Ahead Wealth Managers. For example, to fund a goal which is three years away, you decide to invest in this scheme. In the third year, let’s say the fund manager takes exposure to long-term gilt funds by assuming that interest rates are headed downwards. If the call goes wrong, the scheme’s returns may be hurt and affect your corpus. You should not ignore fund manager risks, though with diversification there is still some scope for downside protection.
Dhawan advises, “Observe the fund manager build the portfolio. Let the scheme build some track record before you invest.”
Gains earned on investments held for at least three years are taxed at 20 per cent after indexation. Short-term gains are taxed at the slab rate of the investor.
The NFO will close on 22 January.
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