Final Up to date on Jan 30, 2025 by Vanessa Sequeira
All traders are totally different. Many could not have the ability to digest the tide of fairness whereas the protection of debt may not excite some others. The mutual fund business has been evolving to cater to all traders by way of numerous sorts of schemes personalized to the numerous danger profiles of traders. Fund of funds (FoF) is one such scheme that invests its pool of sources in different mutual funds accessible out there. How does this assist? Why ought to one have a look at such an possibility? Let’s deep-dive into what FoFs are.
What are fund of funds?
Fund of funds is a mutual fund funding scheme whereby the pooled capital of traders is invested in one other mutual fund slightly than diversifying into equities, bonds or different asset courses. This helps traders create a portfolio of mutual funds as a substitute of direct publicity to shares, bonds, or different securities. This additionally signifies that the underlying investments for an FoF are the models of different mutual fund schemes.
The FoF works in two methods, the fettered method and the unfettered method. A fettered method of investing signifies that all the capital of a fund is invested in portfolios managed by the identical funding firm. In an unfettered method, the investments are made into exterior funds which totally different fund managers and fund homes handle.
FoFs might be home, as in, spend money on home mutual funds, or give traders a singular alternative to get publicity to overseas markets by way of a overseas FoF! In a overseas FoF, the home fund invests its capital within the portfolio of a overseas fund that has publicity to securities native to that nation or international belongings.
Well-liked sorts of fund of funds
Asset allocation funds
Such a fund seeks publicity to funds that include a number of funding asset courses, together with fairness funds, debt funds, commodities funds equivalent to gold funds, and will even have funds with overseas publicity. The diversification this FoF offers is giant scale. For a similar motive, the danger is considerably low.
Gold funds
Gold FoFs spend money on numerous mutual funds which have publicity to gold securities. Often, gold funds commerce in gold securities or direct investments into gold buying and selling corporations. The funding alternative is determined by the asset administration firm.
Overseas or worldwide fund of funds
The worldwide fund of funds targets overseas mutual funds and creates a portfolio round overseas funding belongings. This has a number of advantages, together with geographical diversification and, most significantly, excessive yield technology within the case of bull runs.
Multi-manager fund of funds
It is among the commonest sorts of FoF within the Indian market. It includes a number of asset courses that totally different fund managers handle. Every fund within the portfolio caters to a selected asset class {that a} skilled fund supervisor manages. As an illustration, one supervisor manages the fairness asset class, one other supervisor specialising in commodities will deal with commodity funds, and many others.
Change-traded fund of funds
This FoF includes numerous exchange-traded funds within the portfolio. Majorly, traders whose major monetary objective is wealth creation with the ability of excessive liquidity typically desire investing in these FoFs.
These aside, there are numerous extra sorts of FoFs within the international markets equivalent to non-public fairness FoF, hedge fund FoF, funding trusts FoF, and many others.
Benefits of fund of funds
Diversification
As FoF invests in a number of mutual funds, it ensures multi-pronged diversification of portfolio and buffers wealth towards sudden financial or political turmoil.
Skilled managers
Professionals who handle the FoF portfolio have years of expertise within the monetary markets. They make funding choices based mostly on traders’ monetary objectives and attempt to beat indexes to generate most returns for traders. The portfolio of FoFs is created maintaining in thoughts numerous danger profiles and technique goals to realize the aims of the fund.
Alleviation of danger and volatility
The volatility in FoF is usually significantly low. Debt funds and G-sec funds offset the volatility and danger related to fairness.
Low useful resource requirement
Fund managers do all of the analysis required to spend money on mutual funds and hedge funds on behalf of purchasers. Due to this fact, traders with restricted monetary sources can simply spend money on FoF.
Disadvantages of fund of funds
Expense ratio
Given FoFs spend money on different funds, there are a number of layers of administration prices concerned in managing FoFs. This makes it an costly fund to spend money on.
Tax
FoFs are handled as non-equity funds for the aim of taxation. Even when the fund invests in an equity-oriented scheme, it’ll nonetheless be handled as a debt scheme and taxed accordingly.
Overlap of holdings
When the funds are invested in a number of mutual funds, the possibilities of having the identical securities are excessive. As an illustration, if any small-cap firm is similar in two of the funds invested, then even a small fluctuation within the value on the draw back can have an effect on the portfolio considerably.
Conclusion
Fund of funds affords a singular proposition to traders who’re risk-averse and need to decrease their dangers. These mutual funds spend money on the portfolio of different mutual funds, thereby offering traders with ample diversification throughout markets and market segments. FoFs are additionally a preferred route by way of which Indian traders get publicity to overseas markets and worldwide investing. Nonetheless, they are often costly to spend money on. Attain out to your monetary planner to grasp if these schemes work on your danger profile.
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