Fund of Funds: Fees upon Fees?
First, the news: Optimix targets Rs 5000 cr AUM, via Business Standard.
The fund-of-fund schemes, which manage portfolio assets containing a suite of funds belonging to various mutual fund houses . . .
The challenge for Optimix is to increase its assets base without raising money through liquid funds (eg. FMPs). Some new mutual fund houses in India are ramping up their asset base by launching liquid funds, which easily attract surplus short-term cash from companies.
Considering that 80% of mutual fund investors do not have a demat account, Optimix’s Gold scheme hopes to attract these large pool of untapped investors.
Next, reading in between the lines:
- Besides paying the loads & expenses for the mutual funds in OptiMix’s portfolio, you will also pay them another 1% of your investment for picking those mutual funds.
- If you were on the receiving end of 1% of x, what is the first thing you would do? Increase x!
- For some of their offerings, they also charge entry/exit loads of 1-2%.
- Given that most mutual funds do not beat the index, what are the chances that a FoF will do so, especially after accounting for these layers of fees?
Finally, the bottom-line: Prepare for disappointing returns from most of such FoFs. But if you are looking for a job where you can get a fixed percentage of OPM (other people’s money) no matter how you perform, they might be the place to go 
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