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Over a decade, mutual funds have gained popularity among the investors seeking investment
opportunities in financial markets. Generally, mutual funds facilitate greater diversification
through professional management at substantially lower cost. In recent years, numerous
schemes of funds were made available to meet the needs of various investors. However, it is
difficult for the investors to measure and identify superior performing funds and the quality
of the management of the investment company. Generally, the investors do not have
sufficient knowledge, time, cost and information about mutual funds. In order to overcome
these problems, a new category of mutual funds is being introduced, i.e., Fund of Funds
(FoF). The issue of identifiying the superior performing funds remains unresolved; however,
FoF is an investment strategy of holding a portfolio of other investment funds rather than
investing directly in shares, bonds and other securities. FoF are being traded in American
market since the 1980s. In India, Securities and Exchange Board of India (SEBI) has
permitted fund houses to launch FoF in mid-2003 by amending SEBI (Mutual Funds)
Regulations Act, 1996. The first Fund of Mutual Funds is ‘FT India Dynamic PE Ratio FoFs’
launched by Franklin Templeton Mutual Fund during October 2003. Thereafter, many
other asset management companies launched fund of mutual funds, and at present there
are 33 funds of mutual fund schemes with a capitalization of more than 150 mn.
For a decade now, mutual funds, as a special investment vehicle, have captured the attention
of investors, business analysts and academicians. This paper intends to contribute to the
growing literature on mutual funds with an empirical examination of the determinants of
fund of mutual funds. Internationally, the research examining performance of funds begins
with the early works of Treynor (1965), Sharpe (1966) and Jensen (1968), and they observe
that the markets are active to create returns to the investors. In contrast, Ippolito (1993),
Gruber (1996), Sirri and Tufano (1998), and Del Guercio and Tkac (2002) identified the
interesting result that fund managers perform better than the market. A few studies found
that fund managers fail to beat the market or stay even with the market before management
fees (Grinblatt and Titman, 1989; Grinblatt et al., 1995; and Daniel et al., 1997). Then, it is
observed that mutual fund investors apparently wish to pay a lot on fees for limited stockpicking
ability, which ultimately resulted in negative returns (Jensen, 1968; Malkiel, 1995;
and Gruber, 1996).
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