Edelweiss Mutual Fund house has launched a new fund. Lets review Edelweiss US Technology Equity FOF or Fund of Fund. What is fund of fund? Should you invest in it? Or there are better options? Let’s review and see. NFO opened on 14th Feb and closes on 28th Feb 2020. Being open ended scheme, later it will open for normal subscription. You can see presentation from fund house itself here.
1. Fund of fund? What does it mean
Generally mutual funds directly invest in underlying assets like stock. But in case of fund of fund, mutual fund takes indirect route. Instead of directly investing in say stocks, fund invests in other fund. Sounds confusing? Why would someone invest in such fund which invest in other fund and not directly in that other fund. Let’s understand when one would do such investment.
I could think of two scenarios for a investor to behave like this. First scenario is where due to some legal or administrative issues, investor is not allowed to invest in that other fund. This is scenario here. If you as Indian investor want to invest in US Equity mutual fund, you might need to go through complicated registration process to register as foreign investor. And even if we are able to do so, just think how difficult it would be managing foreign exchange etc. If however someone gives you option of starting SIP of even Rs. 500 even without any of above difficulties, what would you prefer. Edelweiss Mutual Fund is giving same opportunity. If you are interested in investing in underlying JP Morgan Fund – US Technology Fund, then you can indirectly do via this new fund from Edelweiss.
Another scenario for Fund of Fund is when some investors do not want to spend time and money in choosing good funds. Instead they would prefer a fund manager to select good performing funds and keep regular tab on same. So what your mutual fund agent is doing, you are expecting it to be done by a fund manager. This is not relevant here so will not discuss for now.
This fund technically falls under category called – Other Scheme – FoF Overseas. But if you really want to see historic performance of similar funds, check international funds here. You will see lot of funds investing in various countries. Filter US funds for better comparison.
You may wonder. Why fund house is launching this fund at this time? International funds investing in US have done very well in recent years. As of today (Feb 2020) both Motilal Oswal Nasdaq 100 FOF and Franklin Feeder Franklin US Opp have given around 30% returns this year and investors looking only at returns will start investing in this theme. So Edelweiss too would like to provide an option for interested investors.
2. How does this work?
For investor, there is no change in process. You can do lumpsum, SIP, STP, etc. Everything remains same. It’s just internal operating of fund is little different. Collected money would get invested in another mutual fund from US. JP Morgan Technology Fund in this case.
My personal observation in international funds is that generally redemption takes little long compared to normal funds investing in Indian stocks. A week or so. But it should not be a deal breaker.
3. Asset Allocation of Edelweiss US Technology Equity FOF
As you can see from above image from Scheme Information document, almost entire money would be invested in JP Morgan Funds – US Technology fund except small amount kept aside for managing redemption etc.
So if we really need to understand actual asset allocation, we need to see how JP Morgan fund invests internally. If we go through presentation here, we would come to realize following things.
- This is a multi cap fund – which means it will invest across different market cap US companies.
- Focus is on Technology sector – we all know as far as technology sector is concerned, US has edge over others (may be China is catching up)
- Fund is banking on innovation in Semiconductor, cloud computing, AI / Machine learning, Autonomous car, 5G, software, hardware, digitization etc
4. Risks and returns
Underlying fund is US equity fund. So equity related risks hold true for this fund as well. However I feel as US is a developed country, markets there are relatively stable. So volatility should be less than Indian stock market. Even returns in long run may be little less than developing markets like India.
Portfolio has 50 to 70 stocks which is good diversification. Well diversified funds should have less risk compared to concentrated funds with say just 25 stocks.
Thematic style – Fund is primarily focusing on technology theme so any negative impact there will adversely impact the performance. So one needs to keep a watch on this trend and is not a true diversified fund which invests across different funds. Software and Semiconductors currently constitute almost 70% of overall portfolio which is significant proportion.
INR – USD conversion – We as investor would invest money in Indian rupees which would get converted in US dollar for investing in US. When we redeem, it would be converted back to INR from dollar. So currency rate fluctuation would impact returns. If rupee depreciates against US dollar, we would get better returns and if it appreciates, we would get less returns. Lets take a hypothetical example.
- Lets say 1 USD is 72 Rupee.
- You invest Rs 72000 in this fund.
- That would get converted in USD 1000 while investing.
- In a year fund raises 10%.
- Your investment valuation become USD 1100.
- But let’s say by then INR depreciates and is 75.
- If you redeem, you would get 1100 * 75 = Rs. 82500. So though actual equity rose by 10%, you would get almost 14.5%.
- Even reverse is true. If Rupee appreciates, your return would be less than 10% due to currency impact.
So you need to consider how you foresee US market, currency appreciation, technology trends to understand risk and returns.
In NFO, you generally can not guage future performance as no past history is available. This being fund of fund, we know all the money is going to be invested in existing fund so we can gauge expected returns based on past performance. Below image from scheme presentation may help give you confidence.
5. People behind J P Morgan Technology Fund
As seen from image below, a very experienced team is behind taking decisions in underlying fund. So I expect money would be carefully managed.
6. USP of Edelweiss US Technology Equity FOF
Edelweiss US Technology Equity FOF is focusing on specific niche area – which is expected revolutionary changes in technology in near future. As such changes are more likely to happen in US, investing in technology companies in US would reap rich rewards. At least that is what is unique and separates it from most of the other funds.
7. Who are peers of Edelweiss US Technology Equity FOF
I think closest comparison for this fund would be Motilal Oswal Nasdaq 100 FOF which internally invests in Motilal Oswal NASDAQ 100 Exchange Traded Fund. If we see performance of later over 1,3,5 & 7 years, we see returns are 38.11, 24.29, 19.88 and 24.02 which is very impressive. Franklin India Feeder Franklin US Opportunities Fund too is a peer as that also invests in US mutual fund but its not technology focused.
8. Risk factors
1) I feel this is very high risk fund because
- It is Investing in equity class
- Focus is on single theme (technology trends)
- Being international, it is subject to country specific regulations & political as well as geographical situation
- Currency impact
2) US elections are due soon and as with any other country, outcome of election would have impact on US stock market. Though there is no concept of coalition government in US, change in policies would have positive or negative impact on stock price and in turn returns.
2) If Indian economy becomes strong, rupee would appreciate compared to dollar and it will negatively impact returns while redemption.
For tax purpose, this fund will be treated like an debt fund (Indian government will not be giving tax benefits for investing overseas).
Long term capital gains will be taxed 20% with Indexation (if held for more than 3 year) or Short term capital gains will be taxed as per your income tax slab (if held for less than 3 years)
Before you read conclusion – a disclaimer. Please note – I am not advising you on any financial decisions and you should do your own research and consult your financial advisor before making any financial decision. This article should be treated only as my personal view. Also note that personally I am invested in Franklin India Feeder Franklin US Opportunities Fund which is a peer for this fund. At this stage I prefer to stick with same and not switch to this fund.
High Risk – High Rewards but there are other alternatives
I personally feel international funds are good way of getting geographical diversification. We should invest some part of our portfolio in other countries. US and China and two big economies as well as super powers. Investing in these two should give some stability to our portfolio. So, irrespective of returns, one should have some part invested in these type of funds.
If you like concept of geographical diversification and believe in technological trends, you can consider Edelweiss US Tech Equity FOF for investment. Please note however one should be willing to take risk associated with such fund. Underlying fund is good performer but you can also look at Motilal Oswal NASDAQ 100 Exchange Traded Fund. Being ETF, it will be cheaper option. If you are not too much focused on Technology theme but need geographical diversification of US, you can look at Franklin India Feeder Franklin US Opportunities Fund.
But all above funds technically fall under debt schemes for taxation purpose. Another good option to get similar diversification is Parag Parikh Long Term Equity Fund. This fund smartly invests 65-70% in Indian stocks and rest in top international stocks. This qualifies it for better tax treatment. Also investment in International stocks is direct and not via a fund. So this is cheaper from expense perspective. But you need to check the portfolio to see if it suits your risk profile as it has habit of taking aggressive positions. As of today, it has more than 9% invested in each of top three stocks.
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