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FOF, simply Funds of Funds, is a mutual fund scheme that invests in other mutual fund schemes. In this, the fund manager invests and holds shares of different mutual fund schemes instead of investing in equities or bonds.
Investing in FOF is generally taken as ‘not a bad idea’, but what is always recommendable ‘Read all scheme related documents before investing’ is always important to an individual before he decides to invest in any specific fund or scheme.
So, before you plan to invest in Funds of funds, you must learn about it, like what exactly a fund of funds is, how is your money going to get invested, what kind of returns can you expect, etc.
Key Takeaways-
- Fund Of Funds (FOF) is a mutual funds scheme that invests in other mutual funds schemes and not directly in stocks and bonds.
- FOF works as per the varying degrees in risk as per the investment requirement and risk profile of the investor.
- Benefits of investing in FOF are various like tax-friendly, easy to handle with a single NAV and a good opportunity for small investors.
- Small investors or investors with small amounts of funds available for investment each month can consider investing in Fund of Funds.
What is Fund of Funds (FOF)?
As mentioned above, a FOF is a kind of schemes that instead of investing directly in equities or bonds, invest in other mutual funds scheme.
For example, when you invest in a particular mutual fund, that particular mutual fund further invests your money directly in the market. But, when you invest in a fund of funds, the fund of funds invests your money in various mutual funds and then those mutual funds invest in the market.
How Do The FOF Work?
The Fund of Funds Schemes typically works based on the varying degrees of risk to match the varying requirements and the risk profile of the investor.
Like for example if an investor’s objective is to gain high returns, then the fund of funds will invest in mutual funds delivering high returns, however, at the same, the degree will also be high.
Advantages Of Investing In Funds Of Funds!
There are numerous advantages of investing in FOF’s, that are listed below:
Tax-Friendly- Rebalance and after that reallocation is generally done to maintain the required balance between equity and debt, this process attracts some tax on capital gains.
Surprisingly if you wish to rebalance and reallocate your assets in FOF, there will be no tax on capital gains for this internal transaction.
Opportunity For Small Investors- These funds allow small investors to take part in diversified underlying assets. These assets would otherwise be hard for such investors to access individually.
Easy Handling- In the fund of funds (FOF), there is only one NAV to track and only one folio, which makes it easy to handle and manage by the investor.
Disadvantages Of Investing In Funds Of Funds!
Investing in fund of funds do have some disadvantages, listed below:
High Expense Ratio- Investing FOF do incur kind of expenses like general management and administrative fees similar to mutual funds, however in FOF there is an added expense about the underlying funds.
That is simply when you invest in FoF, instead of the expense ratio being just 1%, as an investor, you will still pay this amount on every fund that the FoF owns. Simply expense ratio is high than mutual funds.
Too Much Diversification- Funds of funds invest in other mutual funds schemes that in turn invest in other securities. In the way, sometimes FOF ends up investing in MF schemes that invest in the same stocks and securities.
In such a situation the point of diversification is eradicated.
Who Should Consider Investing In FOF?
Small investors or investors with small amounts of funds available for investment each month can consider investing in Fund of Funds. The diversification of funds helps to reduce the risk. Also, investors who have an investment horizon of around 5 years or more can think about investing in Fund Of Funds (FOF).
Keep reading our article to know more about investment and finance.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).