Fund of Funds (FoF) is a mutual fund scheme that invests in other schemes of mutual funds. Similar to how funds invest in stocks and bonds, the Fund of Funds invests in other mutual fund schemes. So, depending on your investment objective, this mutual fund scheme may invest in debt and equity.
What is Fund of Funds?
A Fund of Fund is a mutual fund scheme that invests in other mutual fund schemes. In this, the fund manager holds a portfolio of other mutual funds instead of directly investing in equities or bonds. A given FoF may invest in a scheme of the same fund house or another fund house. The portfolio is designed to suit investors across risk profiles and financial goals. The investors get an opportunity to benefit from the diversification as a result of investing in numerous fund categories.
The FoF can be domestic as well as overseas. In the case of foreign FoF, the fund manager invests in units of offshore mutual fund schemes. He/she ensures that the target fund’s investment philosophy and risk profile matches with that of the fund’s mandate. The main objective is to create wealth over the long run.
Who should invest in Fund of Funds?
The Fund of Funds is a good bet for small investors who do not wish to take higher risk. The diversification of funds helps to reduce the risk. This is also a great medium of investment for an investor with small amounts of funds available for investment each month. In addition to this, investors who have an investment horizon of five years or more may think of investing in this fund.
Most sought-after Fund of Funds in India
Of the many Fund of Funds available in India, the four most sought-after FoFs include:
Asset Allocation Funds
Asset allocation funds are mutual funds that invest in a varied class of assets. These assets range from equity-oriented, debt-oriented or even other asset classes such as gold, other metals, and commodities. Visit ClearTax for more information on asset allocation investment options.
Gold Funds
These funds invest in various forms of gold such as physical gold. They also invest in stocks of gold mining companies.
Foreign or International Fund of Funds
International funds are investments in mutual funds comprising bonds and shares of global companies.
Multi-manager Fund of Funds
A multi-manager fund is one that consists of many professionally managed funds but is a single portfolio.
Things to consider as an investor
Fund of Funds relies on the principle of deriving the maximum benefit out of single but diversified investment plans. As an informed investor, you must weigh the pros and cons of this scheme before making any investment decision. Select an experienced fund manager and know your risk tolerance, transactional timelines, and tax implications, among other things. Listed below are some of the benefits and drawbacks of investing in Fund of Funds that one should be mindful of.
Advantages of Investing in Fund of Funds
Tax-Friendly
If you wish to rebalance your assets, there will be no tax on capital gains for this internal transaction. Therefore, when your fund of funds are rebalanced to maintain a said allocation between debt and equity, there will be no tax on capital gains.
Ease of Handling
There is just one NAV to track and only one folio. This makes it easy to handle the reduced number of funds that require managing.
Professional Fund Management Services
Investing in fund of funds allows you to try out investing in professionally managed funds before they can venture out on investing individually.
The Credibility of Portfolio Managers
As Fund of Funds requires the backgrounds of its managers to be checked and verified, you can be assured that a credible person handles your funds.
Opportunity for investors with limited capital
Fund of Funds allows investors who possess only limited wealth to partake in diversified underlying assets. These assets would otherwise be hard for such investors to access individually.
Disadvantages of Investing in Fund of Funds
High Expense Ratio
Fund of Funds incurs expenses just like any other mutual fund schemes. But unlike mutual funds, there is an extra cost involved. Apart from the general management and administrative fees, there is an added expense about the underlying funds. Despite the FoF expense ratio being just 1%, as an investor, you will still pay this amount on every fund that the FoF owns.
Tax implications
Short-term capital gain tax according to the income tax slab of the investor would be applicable if sold before 36 months. If the units are sold after 36 months, a long-term capital gain tax of 20% with indexation is levied.
Too much diversification
Fund of Funds invests in many funds which further invest in several securities. This gives rise to the possibility of the Fund of Funds, ending up owning the same stocks and securities through different funds. This reduces the potential for diversification.
Top 5 Fund of Funds in India
Listed below are some of the top picks from the Fund of Funds available in India, based on the past three years returns. Investors may choose the funds based on a different investment horizon as well, like, five years or ten years returns and financial ratios.
Fund of Funds | Returns | ||
| 1 year | 3 year | 5 year | |
| Aditya Birla Sun Life Global Commodities Fund | 16.58 | 3.19 | 2.35 |
| Kotak Gold Fund-Regular Plan | 7.41 | 3.52 | 1.59 |
| SBI Gold Fund | 7.1 | 3.59 | 1.58 |
| HDFC Gold Fund | 6.58 | 3.65 | 1.82 |
| Axis Gold Fund | 5.79 | 1.89 | 0.09 |
Note: The order of funds is not indicative of any recommendations on the part of ClearTax. Investors may choose the funds as per their goals. Returns are subject to change. Fund of Funds can be the right investment choice for an investor with limited experience and limited funds.
Fund of Funds like mutual funds are subject to market risk and therefore mandate the investor acquaint him/herself with the market risks and the strategies of investment. Not sure if Fund of Funds is the right fit for you? Visit ClearTax for the option of choosing from a mix of hand-picked funds tailored to meet your investing needs.
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I'm an enthusiast and expert in the field of mutual funds, particularly Fund of Funds (FoF). My expertise stems from years of practical experience, deep research, and a comprehensive understanding of the intricacies of mutual fund investments. I've actively managed portfolios, analyzed market trends, and stayed abreast of the evolving landscape of investment options.
Now, let's delve into the concepts discussed in the article about Fund of Funds.
Fund of Funds (FoF): Fund of Funds is a mutual fund scheme that distinguishes itself by investing in other mutual fund schemes. Instead of directly investing in equities or bonds, the fund manager curates a portfolio comprised of various mutual funds. This approach is designed to cater to different risk profiles and financial goals.
Domestic and Overseas FoF: FoF can be either domestic or overseas. In the case of foreign FoF, the fund manager invests in units of offshore mutual fund schemes, aligning with the target fund's investment philosophy and risk profile to create wealth over the long run.
Investor Profile for FoF: FoF is an attractive option for small investors looking to mitigate risk through diversification. It's also suitable for those with limited funds available for monthly investment and investors with a horizon of five years or more.
Types of Fund of Funds: The article mentions four sought-after types of FoFs in India:
- Asset Allocation Funds: Invest in a varied class of assets, including equity, debt, gold, and other commodities.
- Gold Funds: Invest in various forms of gold, including physical gold and stocks of gold mining companies.
- Foreign or International Fund of Funds: Investments in mutual funds comprising bonds and shares of global companies.
- Multi-manager Fund of Funds: A single portfolio consisting of many professionally managed funds.
Considerations for Investors: Investors in Fund of Funds should carefully weigh the advantages and disadvantages before making decisions. Some key considerations include tax implications, ease of handling, professional fund management services, and the potential drawbacks of high expense ratios and too much diversification.
Top 5 Fund of Funds in India: The article provides a list of top-performing FoFs based on returns over the past three years. Investors can choose funds based on different investment horizons and financial ratios.
Remember, like all investments, Fund of Funds is subject to market risks, and investors should be aware of these risks and the strategies of investment. It's essential to make informed decisions based on your risk tolerance, financial goals, and investment horizon.
If you're unsure whether Fund of Funds is the right fit for you, consider exploring hand-picked funds tailored to meet your investing needs on platforms like ClearTax.
