Nippon India Passive Flexicap fund of funds review: Should you invest?

For those of us who are new to mutual funds or cannot quite decipher which fund to invest in, it is tricky to choose from over 500 equity schemes spread across categories. Sometimes we choose a multi-cap fund or flexi-cap scheme hoping the fund manager would deliver.

Nippon India Passive Flexicap Fund of fund (NIPF) is a fresh offering that seeks to invest in a bouquet of schemes.

What’s on offer

A multi-cap fund manager decides how much to invest across large, mid and small-cap companies. He also decides the sectors and companies in which to invest. NIPF removes the fund manager’s intervention at both these steps.

To decide its underlying allocation among companies of various sizes, it has tied up with CRISIL. Based on the month-end portfolios of all existing multi-cap funds, CRISIL will ascertain the average proportion of investments of all multi-cap funds across companies of all sizes – large, mid and small.

Then, based on CRISIL’s input, NIPF will invest in Nippon India ETF Nifty 100, Nippon India ETF Nifty Midcap 150 and Nippon India Nifty Small Cap 250 Index Fund to mimic the allocation of the industry. These three products put together avoid duplication and offer exposure to the entire stock universe in question. The rebalancing will be done on a monthly basis. The fund will be benchmarked against the Nifty 500 TRI.

What works

NIPF relies on the asset allocation of all other multi-cap schemes in the industry (including those that may be rolled out in future) and tracked by CRISIL. This captures the industry average and negates the fund manager’s risk. A monthly rebalancing ensures that the fund’s asset allocation remains aligned with the industry’s.

Costs are going to be low compared to actively managed schemes.

“Though investors had the option of investing in low-cost index funds or index ETFs, there was no such option available in the multi-cap category. The scheme offers a multi-cap portfolio, built using low cost ETFs/index funds,” says Arun Sundaresan, Head-Product Management, Nippon Life India Asset Management Company.

What doesn’t

Actively-managed mid- and small-cap funds can outperform passively-managed ones.

“NIPF invests using the collective market wisdom and rebalances it monthly. However, the expected returns from this is highly unlikely to be the best in the category,” says Amol Joshi, founder of Plan Rupee Investment Managers.

Since the fund invests its small-cap allocation in an index fund (for large-cap and mid-cap allocation it will invest in ETFs), it will be classified as a debt fund as far as taxation is concerned. As per the income-tax rules, if a FOF invests its entire corpus in just ETFs, then it gets classified as an equity fund for taxation purpose.

Should you invest?

The scheme’s strategy of using the market’s collective wisdom to its advantage is a good idea. This fund scores over schemes tracking the Nifty 500 or BSE 500 index as most of the money is invested in large cap stocks, given the high free-float market capitalization they have compared to mid and small-sized firms. NIPF relies on SEBI’s boundaries for multi-cap funds and hence is more true-to-label.

Doing away fund manager risk while investing in each segment and a low-cost approach through an index fund should also work in favour of investors in the long term. For investors who swear by low-cost passive investing, content with debt taxation and looking for multi-cap exposure can consider NIPF for staggered investments.

The NFO will close on December 24, 2020.