How good is OptiMix Dynamic FoF scheme?

The primary objective of the Scheme is to generate capital appreciation primarily from a portfolio of equity and debt funds accessed through the diversified investment styles of underlying schemes selected in accordance with the OptiMix Multi Manager Investment Process.
*Source: Offer Document

OptiMix Dynamic Multi-Manager Fund of Funds Scheme (ODFoF) is a close-ended fund with 3-year investment tenure. As the investment objective suggests, it is a fund of fund (FoF), mandated to invest in equity as well as debt funds from across various asset management companies (AMC). The fund proposes to capitalise on the upside of equity market and to switch to debt when valuations appear stretched.

Typically, FoFs are mutual funds, which invest in units of other mutual fund schemes (the underlying schemes can be from a single or various fund houses). They offer investors the opportunity to hold a diversified mutual fund portfolio by being invested in a single scheme. ODFoF, in particular, can invest simultaneously in equity and debt schemes offering investors a mutual fund portfolio that is diversified across asset classes. Thus the risk levels associated with such holdings are theoretically lower than mutual fund schemes that invest in a single asset class.

In order to decide when to switch from equity funds to debt funds and vice-versa, ODFoF will utilise a proprietary quantitative model 'OptiMix Active Asset Allocation Model' (OAAA). This model determines the triggers to shift between equity and debt funds, which in turn identify the entry and exit points in the funds.

It also aids in re-balancing the portfolio of the scheme. The model, in its calculation, takes into account market volatility, its impact on returns and the need to minimise the downside risk during market volatility.

Another feature of ODFoF is the 'OptiMix Active Multi-Manager Process' that uses qualitative and quantitative factors for selecting underlying funds. The fund house has clearly indicated that it will only invest in the schemes of other fund houses and not in the schemes of ING Vysya Mutual Fund (OptiMix is owned by ING Group).

Consequently, this investment proposition offers investors the advantage of benefiting from diverse management styles and the convenience of investing in a single scheme as they are spared the bother of investing and tracking the performance of multiple schemes.

On the other hand, it should be understood that investing in an FoF scheme does not necessarily mean that the returns will always be higher than those clocked by regular mutual fund schemes. Also, the costs associated with FoFs tend to be on the higher end vis-à-vis regular schemes. FoFs can charge a maximum of 0.75% expense; this is over and above the expenses of the underlying funds.

The most important aspect to be considered before investing in an FoF is the selection of underlying AMCs and schemes. Despite the unique ideas and processes that ODFoF professes to offer, its expertise (in the Indian context) on this aspect is yet to be tested over a 3-5 year time frame, which is ideal for an equity fund.

We recommend that investors give ODFoF a miss and should instead consider investing in a well-managed balanced fund with an established track record. The fund is close-ended for 3 years without the option to go open-ended. In our view, a market-linked investment should never 'compel' investors to redeem.

If, at the time of redemption, equity markets are volatile, investors will be required to redeem at lower levels. In an equity market-linked investment, it must always be the investor's prerogative to redeem whenever he wants, not when the AMC wants.

ODFoF will opt for the strategy of relative valuations for allocation of assets between equity and debt funds. The fund house has indicated that relative valuations will be determined by considering the following factors:

• Price/earnings ratio relative to historical averages.

• The relationship between earning yield (P/E inverted) to 10-year bond yield relative to historical averages.

• Institutional flows (foreign institutional investments inflows and domestic inflows) to local equity markets.

• RBI monetary policy stance in conjunction with the slope of the yield curve.

With its ability to invest in equities or debt depending on market conditions, ODFoF offers investors the opportunity to add to their portfolios what can typically be termed as an asset allocation fund.

However, the concept of FOFs is relatively new in the Indian concept and continues to be a largely untested one as well. Furthermore, OptiMix and its offerings are of recent origin as well. Although it has indicated a slightly extended list of AMCs from which it will select schemes, its choice of schemes and AMCs is unclear at this stage. In light of the above, we would like to reserve our comment on the fund's likely performance.

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