Mutual Fund Wrap

A mutual fund wrap offers advice and access to a wide range of funds, enhancing wealth management for investors.
Mutual Fund Wrap
3 min
01-July-2024

A mutual fund wrap, also known as mutual fund advisory or a wrap account, is commonly offered by full-service brokerages. These programs allows clients to create a customized portfolio of mutual funds tailored to their risk tolerance, age, financial goals, and other investment preferences.

Investing in mutual funds is increasingly becoming popular among the Indian investor populace. It is a good way to diversify investment portfolios and lets investors benefit from professional management.

Lately, the concept of mutual fund wrap is slowly gaining traction. A mutual fund wrap is a managed investment account that some full-service stockbrokers offer. It enables investors to invest in a wide range of mutual funds and provides them with personalised investment advice tailored to their needs and goals.

Continue reading to find out all about this unique facility, including a hypothetical example that showcases just how it works.

What is a mutual fund wrap?

A mutual fund wrap is a type of investment account that full-service stockbrokers offer, where investors can select from a list of mutual fund schemes that they wish to invest in. In addition to providing investors access to a plethora of fund options, the account also offers wealth management advisory services.

Investors who sign up for a mutual fund wrap account will have to pay a wrap fee annually to the stockbroker. The wrap fee covers brokerage, management and administrative costs associated with the account and the mutual fund investments. Usually, mutual fund wrap accounts have minimum investment limits and are designed for high-net-worth individuals.

How does a mutual fund wrap work?

Now that you have understood the meaning of mutual fund wrap, let us look at how it works.

High-net-worth investors looking to diversify their portfolios entirely with mutual funds can choose to open mutual fund wrap accounts with full-service stockbrokers. Once the accounts are opened, the investors work with financial advisors, who help them identify their financial goals, risk profile and investment horizon. Based on the investors’ profiles, the advisors will suggest a portfolio of mutual funds. Additionally, the financial advisors also regularly monitor the investments and rebalance them occasionally to ensure that they are in line with the investors’ profiles.

In exchange for the portfolio management service that the mutual fund wrap accounts provide, the investors are charged a fee, known as the wrap fee, annually. This fee covers the costs associated with the wrap accounts and is levied in addition to the expense ratios of the mutual funds in the investor’s portfolio. The wrap fee can start as low as just 0.25% and go all the way up to 3%, depending on the nature and extent of services provided and the mutual fund investments in the portfolio.

High-return mutual fund categories for smart investing

Equity Mutual Funds Hybrid Mutual Funds Debt Mutual Funds
Tax Saving Mutual Funds NFO Mutual Funds Multi Cap Mutual Funds


Example of Mutual fund wrap

Assume you wish to construct a diversified portfolio of mutual funds. You approach a full-service stockbroker and open a mutual fund wrap account with them by depositing Rs. 5 lakh, which is the minimum investment limit. The stockbroker assigns a financial advisor with whom you work to identify your financial goals, your investment horizon and your risk tolerance level.

Based on your interactions with the financial advisor, you determine that your goal is to create a corpus large enough to purchase a new home and retire comfortably within 20 years. Also, you discover that you have a moderate risk tolerance level.

The financial advisor suggests a list of mutual funds that align with your goals, risk tolerance and investment horizon. You can select the kind of funds that you wish to invest in from the suggested list.

Let us say that you choose to construct an investment portfolio by investing in four kinds of mutual funds: an equity index fund, a mid-cap equity fund, a corporate bond fund, and a GILT fund. The allocation of your Rs. 5 lakh investment capital in the above funds is as follows:

The stockbroker levies a wrap fee of 1.5% per year on the total amount in the mutual fund wrap account. This essentially means that you need to pay Rs. 7,500 (Rs. 5,00,000 x 1.5%) each year. The single wrap fee covers a plethora of costs associated with the account, including the wealth management service fee, account maintenance fee, brokerage fee, and other trading costs associated with the purchase and sale of mutual funds. It is important to keep in mind that the wrap fee is levied in addition to the expense ratios of the above mutual funds.

The financial advisor assigned to you regularly monitors your mutual fund portfolio to ensure its performance is in line with your goals. They will also rebalance the portfolio from time to time to maintain the initial asset allocation mix.

A rising alternative to traditional mutual fund wrap programs

Mutual fund wraps are a good option for high-net-worth individuals who wish to diversify their portfolios without compromising their ability to create wealth. However, a major disadvantage of mutual fund wrap accounts is the high costs associated with them. Since the wrap fee is charged on top of the expense ratios of the mutual funds in the portfolio, it can significantly reduce returns for investors.

However, with the emergence of robo-advisory powered by artificial intelligence, many full-service stockbrokers are now resorting to offering mutual fund wrap programs with them. The use of robo-advisory automates investment profiling and mutual fund portfolio construction, leading to a lower wrap fee. Furthermore, it also has other benefits, such as lower minimum investment limits compared to traditional mutual fund wrap programs, making them more accessible to a wider range of investors.

That being said, it is important to note that mutual fund wrap programs offered with robo-advisory services usually offer exchange-traded funds (ETFs) rather than traditional mutual funds.

Availability of mutual fund wrap program investing

Since mutual fund wrap programs involve the use of dedicated financial advisors with experience navigating the complexities of financial markets, they are only offered by full-service stockbrokers. You cannot find such programs from discount stockbrokers, as they do not offer any kind of value addition apart from regular trading services.

Furthermore, mutual fund wrap accounts are currently only available in foreign markets like that of the U.S. The concept has yet to make its way to India. Therefore, if you wish to open such an account, you need to do so with a U.S. full-service stockbroker.

Key takeaways

Here are some key takeaways on the concept of mutual fund wrap that you need to keep in mind.

  • Mutual fund wrap accounts enable investors to get access to a wide range of mutual funds and personalised portfolio management advice from experienced financial advisors.
  • Mutual fund wrap programs are usually offered by full-service stockbrokers and not by discount brokers.
  • Mutual fund wrap programs suggest a list of mutual funds based on factors such as the investors’ financial goals, investment tenure, and risk profile.
  • Most mutual fund wrap accounts have minimum investment amounts and cater to high-net-worth individuals.
  • The concept of mutual fund wrap is currently only available in the U.S. markets and is yet to make its way into India.

Conclusion

A mutual fund wrap could be a good investment solution for investors seeking professional management, diversification, and convenience. It enables them to leverage the experience of financial advisors to create a personalised investment strategy that aligns with their goals and profile.

If you are planning to invest in mutual funds, the Bajaj Finserv Mutual Fund Platform can help you choose the right option. The platform has a dedicated tool with which you can compare mutual funds across different key metrics. Additionally, you get access to a mutual fund calculator that lets you estimate the returns that your mutual fund investments are likely to generate.

Essential tools for mutual fund investors

Mutual Fund Calculator Lumpsum Calculator SIP Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator Motilal Oswal Mutual Fund SIP Calculator Kotak Bank SIP Calculator

Frequently asked questions

What is a mutual fund wrap account?
A mutual fund wrap account is a special investment account that is managed by professional and experienced financial advisors. Through the account, investors can leverage financial advisory services to construct a portfolio that aligns with their goals.
How does a mutual fund wrap account work?
Full-service stockbrokers assign a financial advisor to a mutual fund wrap account. The advisor works with the investor to determine their goals, risk profile, and investment horizon. Based on the investor’s profile, they construct a portfolio of mutual funds. In exchange for the managed account services, investors must pay a wrap fee annually to the stockbroker.
What are the advantages of a mutual fund wrap account?
Some of the key advantages of a mutual fund wrap account include diversification, professional management, and a streamlined fee structure.
What fees are associated with a mutual fund wrap account?
Mutual fund wrap accounts levy a wrap fee, which covers the costs associated with advisory services, fund management, and administration. The fee is levied as a percentage of the value of the investments.
Are there any risks involved with mutual fund wrap accounts?
Yes. As with all kinds of market-linked investments, mutual fund wrap accounts also carry the risk of capital loss due to volatile or adverse market movements.
Can I choose the mutual funds in my wrap account?
Yes. Most mutual fund wrap accounts enable you to choose the mutual funds you wish to invest in. That said, you may also opt to leave the decision to the financial advisor.
Can I make changes to my mutual fund wrap account?
Yes. You may make changes to your mutual fund wrap account in consultation with your financial advisor.
Are mutual fund wrap accounts suitable for all investors?
Mutual fund wrap accounts are suitable for high-net-worth investors who prefer professional portfolio management since they often have high minimum investment limits.
Are mutual fund wrap accounts insured by the government?
No. Mutual fund wrap accounts are not insured by the government, making them fully susceptible to market volatility.
How can I find a reputable financial advisor or brokerage firm for a mutual-fund wrap account?
The best way to find a reputable brokerage firm for a mutual fund wrap account is through extensive research. You can also check the reviews of the brokerage firms posted online to get a better idea of their reputation. Also, consider opting for financial advisors with credible certifications and registrations.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.