A pooled fund called a fund of funds (FOF) holds a portfolio of other funds rather than making direct investments in stocks, bonds, or other securities. It may invest in one or more schemes from the same fund house or from different fund houses.
What is a Fund of Funds?
A mutual fund that uses its pool of resources to invest in various other types of mutual funds on the market is known as a fund of funds. Depending on the manager’s primary objective, fund of funds MFs have portfolios with varying degrees of risk.
If the portfolio manager’s main goal is to maximise yields, then mutual funds with larger NAVs will be targeted, even though they come with a higher level of risk.
Depending on the asset management company’s discretion, these mutual funds may be utilised to invest in both domestic and international funds. This expands the fund funds’ diversification.
They are maintained by highly skilled, experienced professional portfolio managers, which is their defining quality. This helps to some extent ensure correct market projections, reducing the likelihood of sustaining a loss.
How Does It Work?
Mutual funds make investments in a variety of products, including debt and equity instruments. On behalf of their investors, they make investments in a company’s stock and debt securities. As FoF invests in other mutual funds, depending on the underlying investment strategy, the fund manager may invest in a single fund or funds from various fund houses.
Advantages Of Investing In Fund of Funds
Let’s now take a closer look at some of the main benefits of FOFs.
1. Easy Rebalancing
Rebalancing is essential when it comes to managing the investment portfolio. It could be necessary for investors to sell some investments and buy others in order to rebalance their portfolios.
The main benefit of a fund of funds is that it allows investors to access a variety of mutual funds with various investment objectives with just one investment. The best performing mutual funds on the market that each focus on a specific asset or kind of fund are targeted by the fund of funds. Due to the variety of the underlying portfolio, both returns and risks are optimized, usually ensuring gains through diversification. Investors can explore various fof like the axis global innovation fund of fund on Kuvera.
3. The Various Fund Managers’ Investment Strategies
FOFs invest in a variety of mutual funds, both domestic and international. The benefit of investing in a portfolio that is managed generally by many fund managers and their research teams is thus available to FOF investors. A fund of funds is managed by professionals with years of expertise and extensive training. These portfolio managers do a thorough study and make calculated market predictions that usually guarantee high returns using complex investing strategies.
4. The Convenience Of Investing In Gold And Foreign Markets
Investment in global companies is also made simpler by international FOFs. To invest in the stocks of multinational corporations, investors do not need to open a separate account with a different intermediary. Through international funds, investing can be started right away. Similarly, gold funds offer an accessible way to invest in paperless gold.
Disadvantages of Fund of Funds
There are some drawbacks to FOF, just as there are some drawbacks to other types of investments. Let’s examine a few FoFs’ shortcomings.
1. Lack of Flexibility
One significant drawback of FOF is that investors are unable to select the mutual funds or investment approach that a fund manager uses. If one doesn’t like any fund, their only choice is to keep investing in it or, if they’ve already made investments, to sell them. This means that if a fund manager has investments in multiple mutual funds, investors will automatically have exposure to these funds.
2. Higher Expense Ratio
FOFs occasionally could have a higher expense ratio. The annual fee that fund companies charge to manage the investments is known as the Total Expense Ratio (TER). It is determined as a percentage of the fund’s overall assets. The expense ratio that these funds can charge has also been capped, and SEBI has separated the FoFs based on the underlying schemes.
3. Portfolio Duplication is a Possibility
FoFs may have exposure to the same stock or debt security across many funds because they invest in various mutual funds. Due to the duplication of the portfolios, the opportunity for diversification may be limited.
If someone is a beginner investor, the fund of funds category might be a suitable starting point because it consists of a collection of mutual funds that invest in a variety of assets and securities. Fund of Funds gives investors access to specific asset classes, including international companies, that would otherwise be challenging to invest in through conventional mutual fund schemes.
Frequently Asked Questions (FAQs)
Q1. Who Should Invest In Fund of Funds?
The top fund of funds’ main objective is to maximise returns by investments in a diverse portfolio with less risk. Such a Mutual Fund may be chosen by people who have access to a little amount of money that they can spare over a longer period of time. Access to high-value funds is also generally ensured because the portfolio of these funds includes a variety of Mutual Funds. Ideally, investors with relatively little resources and low liquidity can invest in the market’s best fund of funds. They can thereby achieve maximum results with little risk.