NFO review: Mirae Asset Equity Allocator FoF to allocate between market caps based on valuation attractiveness

The major advantage of this offering is that it provides an MF experience while investing in ETFs and potentially tax-efficient structure; however, these benefits come at a higher cost

Kumar Shankar Roy Sep 7, 2020

ETF selectionMirae Asset Mutual Fund is launching a new product – Mirae Asset Equity Allocator FoF. This will be an open ended fund of fund scheme predominantly investing in units of domestic equity ETFs. The new fund offer period begins September 8 and closes on September 15. This product offers convenience for those with aggressive risk profile and who want to invest in ETFs. If you feel that Fund of Fund (FoF) is one of the best ways to equity asset allocation, you can consider this scheme. In this article, we will go through various facets of this alternative route suggested by Mirae to take advantage of ETFs through the MF route.

For equity allocation only

One of the major differences between Mirae Asset Equity Allocator FoF and any other asset allocation fund is that the former is for equity allocation through index-linked segment. Many investors want a simple product which will automatically decide equity allocation into largecaps, midcaps and smallcaps. For e.g., if an investor wants to distribute Rs 1 lakh in equities but wants the money to automatically balanced in largecaps, midcaps and smallcaps, at the moment there are not too many choices. This is because most of the asset allocation funds/products today offer asset allocation for debt and equity together. So, there is little by way of choice if you want to, for example distribute Rs 1 lakh, among just equity asset class.

Mirae Asset Equity Allocator FoF is a game-changer in that respect. The scheme will do allocation between market segment (Nifty 50, Nifty Next 50 and Midcap 150 ETFs) based on valuation attractiveness. Do remember that Mirae currently offers Mirae Asset Nifty 50 ETF (expense – 0.07%) and Mirae Asset Nifty Next 50 ETF (expense – 0.14%). It does not have Midcap 150 ETFs, so it may have to rely on other fund-houses for this.

Method to decide valuation attractiveness

The scheme decides how much money will be held in Nifty 50, Nifty Next 50 and Midcap 150 ETFs. This is done based on valuation attractiveness. How does the scheme does it? The method relies on broad fundamental parameters such as estimated Price to Earnings (P/E) ratio, market valuation basis in-house model. So, while Mirae Asset Equity Allocator FoF is a passive play because it invests in ETFs (that track respective index), the product offers a semblance of ‘active share’ with its rule-based model to decide valuation attractiveness.

Mirae Asset Equity allocator

Pros and Cons

* Mirae Asset Equity Allocator FoF allows you to invest in largecaps and midcaps in one single product. You can always of course invest in a large & midcap fund to gain exposure to largecaps and midcaps in a single product. But, most of the large & midcap funds are actively managed. ICICI Prudential Midcap Select ETF is one exception because it follows a large & midcap style. Mirae Asset Equity Allocator FoF is designed to be a predominantly passive play.

* Mirae Asset Equity Allocator FoF follows a dynamic asset allocation framework. This means there is no static exposure to largecaps and midcaps. The exposure can and will change depending on the market outlook. Dynamic asset allocation funds do this job partly because they take asset allocation calls between debt and equity. However, there is no MF product that does it for equity allocation alone. There are some hybrid FoFs like HDFC Dynamic PE Ratio Fund of Funds and ICICI Prudential Asset Allocator (FoF) that do the work of asset allocation.

* Not everybody who invests has a demat account. It is not difficult to get a demat account, but some people don’t have it. To invest directly in ETFs, you must have a demat account. So, the major advantage of this offering lies in the fact that it allows the investor to get exposure to ETFs without having demat account, provides an MF experience (SIPs) while investing in ETFs and potentially tax-efficient structure. However, these benefits come at a higher cost. This is because the FoF will add another layer of expenses to be borne by the investor, on top of the cost of investing in underlying ETFs.

Fund basics

Benchmark – Nifty 200 Index (TRI)

Plans & Options – Regular Plan and Direct Plan with Growth Option and Dividend Option (Payout & Re-investment)

Fund Manager – Bharti Sawant

Minimum investment – Rs 5,000

Exit load – NIL

Taxation – Equity type

RupeeIQ take

Investors have to decide a few things.

* One, do you really need ETFs for your investing goals? ETFs are low cost but the lower cost comes from the fact that there is no active fund management.

* Two, do you really need an FoF to invest in largecap and midcap ETFs? If you neither have the time nor the skill to do this on your own, you can consult a SEBI registered financial advisor to do that for you; if you want to invest in a ready portfolio without any advisory etc., you can go for this scheme.

* Three, do you really need dynamic equity asset allocation to beat markets? Yes, dynamic allocation always is good. But if your money stays only in one asset class (equity), you are not really going to get huge protection. In this regard, a hybrid dynamic asset allocation fund is better. One can even argue that a multi asset fund can provide better downside protection.

Mirae Asset Equity Allocator FoF is for you if you agree that equity asset allocation can be best done by dynamically investing in a basket of large and midcap ETFs. The ETF way of investing offers twin benefits of low cost and absence of fund manager-linked risk of under-performance.

Mirae Asset Equity Allocator FoF offers a handy answer to the most popular question: ‘How much should I invest in largecaps and midcaps?’ Additionally, the fund offers a hands-free solution that picks the funds, decides the equity allocation, does the portfolio rebalancing, etc. In short, the new product seeks to provide a solution to address allocation with equities (large and midcap) in a predominantly passive way.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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