Funds-of-Funds

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What is a Fund of Funds

In simple words, a Fund of Funds is a mutual fund which invests in other mutual fund schemes. Where a traditional mutual fund comprises of a portfolio of shares, a Fund of Funds comprises of a portfolio of different mutual fund schemes. The units held by a FoF scheme would be similar to a traditional mutual fund scheme, with the difference that, they are invested in units of other mutual funds, instead of direct stocks. A FoF helps the investor to reduce his chances of selecting the wrong mutual fund.

Advantages of Investing in Fund of Funds

• Diversification – Investing in a FoF scheme provides the investor greater diversification. A single investment could get the investor a diversified portfolio comprising of equity, debt, money market, bonds or Gold. With greater diversification, a FoF scheme hedges investor risk across various sectors. In principal, all eggs would not be put in one basket.

investing in fund of funds

• Switching between Funds – In a traditional mutual fund investment, any switches or rebalancing between funds would attract a capital gains tax and an exit load for the investor. In a FoF investment, the investor would not be burdened with such costs, as the Fund manager would automatically switch between funds, in line with the investment objective of the scheme.

• Simplicity of Investing – An investor need not keep track of multiple mutual fund schemes and their performances. Investors would have only one folio to maintain and one NAV to keep track of.

• Affordable Investment – New or first time investors, who do not have a large capital for a diversified portfolio, could now diversify from among thousands of funds and stocks, with a small amount of money.

• Benefits from Institutional Investments – Many funds are generally not accessible for retail investors such as top tier funds or closed ended funds. With the FoF scheme, an investor gets access to such funds which are otherwise off limits for small investors.

• Reduced Risk – In a traditional mutual fund investment, it is the capability of the fund manager to choose the right stock to invest in, for the fund to perform well. With a Fund of Fund investment, this risk is reduced for investors who now have their portfolio exposed to investment strategies of various fund managers.