Mirae Asset Equity Allocator Fund of Funds NFO : invest or not ??

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Mirae Asset Equity Allocator Fund of Funds (MAEA) has been rolled out and the offer will close on 15th September 2020. This is the maiden fund of funds offering from the AMC. The scheme will invest in exchange traded funds (ETFs) tracking equity indices focused on shares of large and mid-sized companies.

MAEA aims to invest at least 95% of the portfolio in units of domestic equity ETFs. These would include ETFs tracking the Nifty 50, Nifty Next 50 and Nifty Midcap 150. Bharti Sawant will manage the scheme. The performance of the fund will be benchmarked against Nifty 200 Total Return Index.

The fund house already has its own Nifty 50 and Nifty Next 50 ETFs and hence is expected to invest in the units of its in-house ETFs. The idea is to allocate to a relatively more attractive segment of the stock market and benefit from an opportunity to earn extra return or to contain volatility.

The equity FoF structure brings two key benefits around taxation.

First, despite asset rebalancing, there are no tax implications for the investor, as the buying and selling of units happen at the scheme level and so there is no personal tax liability.

Second, all FoFs investing a minimum of 90% of the corpus in equity ETFs are treated as equity funds for tax purposes.

Since the fund manager is expected to rebalance the portfolio from time to time, investors are expected to witness lower volatility and nominal alpha over the long term. Since an FoF is open ended, investors get rid of issues related to liquidity of the ETFs on the stock exchanges and ticket sizes.

Although MAEA invests in passive schemes, it is not strictly a passive fund. It would still decide in what proportion it would invest across the three indices. To limit the fund manager risk though, Mirae Asset has put in place an algorithm (a formula) to decide how much to invest in the three underlying indices (through ETFs).

Though the AMC has done well in managing most of its actively managed equity schemes so far, there is no pressing hurry to invest as the valuation parameters used to determine the asset allocation of the scheme matters. The success of these parameters will be known only in hindsight and hence you need to wait for the scheme to build the track record to assess if the scheme delivers on its objective.

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