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There would be three fund mergers over next two months and all these three schemes have poor performance. Are fund companies opting for fund mergers to hide scheme underperformance?
Despite the poor response to other similar schemes which have been launched in the past, Franklin Templeton MF and Union KBC MF plan to launch their own hybrid schemes
Franklin Templeton India Allocation Fund and Union KBC Asset Allocation Fund, will offer a mix of equity, debt and gold in their portfolio, according to their offer documents filed with the Securities and Exchange Board of India (SEBI). These schemes offer nothing different from the 19-odd schemes that are already available in the market. The total corpus of these 19 schemes amount to just Rs2,624 crore which is less than the corpus of any one of the top 15 equity diversified schemes. More than half the schemes have a corpus less than Rs100 crore and six of these schemes have failed to accumulate even Rs10 crore. Why has the response been so poor? Underperformance could be one of the reasons.
In our recent analysis, Hybrid Funds: Adding gold did not help , schemes having gold as a part of the portfolio had a lacklustre performance. Just half of them were able to outperform their composite benchmark. Having gold as an investment is risky, apart from this investors have to decide how much they can put in such a fund and how much returns it is expected to generate.
These schemes have varied asset allocation strategies as well. For some fund companies the allocation can go up to 60% in gold, whereas, others restrict themselves to a maximum of 20%-35% in gold. FT India Allocation Fund, which is a Fund of Funds hybrid scheme plans to follow a dynamic asset allocation strategy, where, if the fund manger feels he can invest nil or the entire assets in equity funds, debt funds or gold ETFs. The fund manager is free to choose his own asset allocation. So there may be a time when the fund manager may be fully invested in equity if he sees a big opportunity there or he can move entirely out of equity and keep the assets invested in debt or gold or both. This kind of dynamic asset allocation strategy could be highly risky for the investor. The fund proposes to primarily invest in domestic equity, fixed income, liquid schemes of Franklin Templeton Mutual Fund and domestic gold ETFs.
Union KBC Asset Allocation Fund will be offering investors two different plans. The aggressive plan would invest 55% to 75% in equity, 5% to 25% in debt and up to 20% in gold ETFs. The second plan, which is the conservative plan, will have a lesser allocation towards equity (15% to 25%) and more towards debt (55% to 85%). The allocation towards gold ETFs will remain the same.
Hybrid schemes, especially those that have gold as a part of their portfolio, are best avoided. The returns of these schemes have been erratic in the past. But if one is looking for capital appreciation, which is the prime investment objective of these schemes, investing in pure equity schemes would be the best bet for a long-term investment. But where is gold headed, no one knows. Hybrid schemes are too risky for the short-term and do not look too promising for the long term as well. If one is looking to invest for the long-term, keep it simple, choose an equity scheme with consistent performance.
FT India Allocation Fund
Benchmark: 25% S&P CNX 500 + 25% CRISIL Short Term Bond Fund index + 25% CRISIL Liquid Fund index + 25% Gold domestic prices
Expense ratio: 2.50%
Exit Load: 1% if redeemed/switched out within 1 year of allotment
Union KBC Asset Allocation Fund
Aggressive Plan: 70% S&P CNX Nifty + 15% CRISIL Composite Bond Fund Index + 15% CRISIL Gold Index
Conservative Plan: 15% S&P CNX Nifty + 70% CRISIL Composite Bond Fund Index + 15% CRISIL Gold Index
Expense ratio: 2.25%
Exit load: 0.50% if units are redeemed/switched out within 6 months from the date of allotment; Nil thereafter.