Multi-manager funds a way to diversify

As a consumer or end user, you may believe that more numbers for any product is a good thing. After all, you may get to choose from a wide range of products and services and the increasing competition will keep prices in check. This may be true in most segments, but not quite in the financial markets.

One look at the mutual fund markets and you may be spoilt for choice when it comes to picking a fund. To solve this dilemma, mutual fund companies offer multi-manager funds which give you a chance to invest in multiple schemes and asset classes through a single fund.

Understanding Multi-Manager Funds Unlike traditional mutual funds where money from all investors is managed by a single fund manager, who invests it in equity and debt instruments, multi manager funds have a different operating mechanism.

Typically, a multi manager fund is operated by a lead manager who is supported by co-managers. The fund does not invest directly in equity or debt instruments, but invests in other funds, i.e. in selected schemes or funds. These schemes may be of the same fund house. Depending on the multi manager fund, the fund may invest in either equity schemes, debt schemes or even a combination of both.

Effectively, the performance of the multi manager fund scheme is linked to the underlying funds and their performance.

Here is a look at what makes multi-manager funds important and its apparent advantages and disadvantages for you as a common retail investor.

Benefits of multi-manager funds Ease of investment: Multi manager funds bring with them an ease of investment. Tracking each sector and then investing in a fund that is investing in that sector may be a time consuming affair. Even if you pick independent funds, there is no guarantee that you have picked the right funds for your investments.

Increased professional help with multiple fund managers: Multi manager funds are significant for investors as they allow them a single platform to invest in multiple funds and sectors. So instead of investing in each fund or sector separately, you can simply invest in one multi manager fund and track your investments easily. Since each fund is tracked by a fund manager who is then tracked by a lead manager of the multi manager fund, it increases your chances of putting money in funds offering good returns.

A single platform to track all inv-estment: When you opt in to invest in a multi manager fund, you are in turn investing in multiple funds using a single platform. You fill only one form and a single investment cheque, and your investment becomes diversified on its own. You will get one folio for investing in all underlying funds which makes it easy for you to track your investments.

Drawbacks of multi-manager funds Higher costs than independent mutual funds: Multi manager funds are more expensive than traditional mutual funds. The reason is that there are multiple funds involved and each fund has its own cost. The parent fund as well as subsidiary funds charges expenses towards investment. But the overall expense ratio cannot exceed an upper limit imposed by Sebi.

Lack of customisation:You can’t customise funds to invest in a multi manager fund. This means you are left with no powers change your investment portfolio at any point in time.

Higher taxation: Unlike traditional funds, multi manager funds are not very tax-friendly. Whether the underlying funds selected by the multi manager fund are equity or debt, they are treated as non-equity for taxation. So unlike traditional funds, you do not get exemption on capital gains after one year. You can only get indexation benefits if you invest for three years.

So should you consider multi-manager funds as a new investor Multi manager funds have their pros and cons, but as a new investor with no knowledge or time, opting for a multi manager fund can be beneficial. With a single investment, you can have smaller investments in various segments and sectors. This increases your chances of attaining good returns as the economy grows with time.

Multi manager funds can be a good choice for you if you are a passive investor or a new investor looking to broaden your investment portfolio. The benefits, however, come at an additional cost and lower tax compatibility than traditional funds.

The writer is the CEO of BankBazaar.com