Fund of Funds (FOFs) is a mutual fund scheme that utilizes its pool of resources to invest in other different kinds of mutual funds available in the market. More importantly, investment in hedge funds can also be made by this kind of mutual fund. The portfolio is designed keeping in mind both small and large investors so anyone can invest their money in these types of funds. Let’s understand in detail about FOFs in this article.
Types of Funds
- Asset Allocation Funds: This fund includes diversification of funds that includes equity, debt instruments, and precious metals. With the help of diversification, a high return can be expected with this type of fund with less risk.
- Gold Funds: Gold funds primarily invest the money in gold mutual funds. The investment is also done in different ETFs which invest their money primarily in gold-related schemes.
- International Fund of Funds: International fund of funds targets mutual funds that are operating in foreign countries. This enables people to get the best returns from that particular country’s stocks and bonds.
- Multi-Manager FOFs: These types of FOFs are common in the market and this includes multiple fund managers analyzing different categories.
- ETF Fund of Funds: There are several FOFs that include Exchange Traded Funds in their portfolio. The investment in ETFs through funds of funds is smoother as you don’t have to have a Demat account to buy FOF while you need to have a Demat account to buy ETFs.
The Investors of Fund of Funds: The main goal of FOFs is to provide maximum returns by investing in various portfolios which have minimal risk. It is advised by experts for any individual who look for better returns with the minimum risk associated with the investment. FOFs include a variety of mutual funds which includes high-value mutual funds also.
Advantages of Fund of Funds: The fund of funds enables you to have various advantages. Let’s discuss them one by one.
- Diversification: Diversification is the very important benefit of FOFs as these invest in various best-performing mutual funds available in the market. This makes sure that the returns are expected to be better than normal mutual fund investment because of the diversification.
- Managed By Professionals: FOFs are managed by highly professional individuals who have vast experience with them. They do proper analysis calculate market return predictions to ensure high returns.
- Low Resource Requirements: These FOFs are not only available for HNIs but small investors can also invest through them. One can also invest through monthly investment schemes to ease the process for retail investors.
Limitations of Fund of Funds: FOFs have some limitations too. Let’s discuss.
- Expense Ratio: If you compare the expense ratio of FOFs to mutual funds then it is a bit higher as compared to MFs. Added expense keeps fluctuating periodically and it adds to the expenses which directly affect the returns on that particular FOF.
- Tax: Taxes are to be paid at the time of redemption by investors. Both short-term and long-term capital gains are to be taxed as per the income slab of the investor. Although, on the positive side, dividends that are received on investment are not subject to tax.
Investment in Fund of Funds is the right choice for investors as it put your money in the best of best mutual funds. Although, investors are advised to look at other factors such as the lock-in period. The returns are better in FOFs as compare to MFs however; investors shouldn’t expect very much difference in returns.