FUND OF FUNDS
WHAT ARE FUND OF FUNDS?
Fund of funds are a type of mutual funds investing in other mutual fund schemes, ETFs, or a combination of funds. It is also known as a multi-manager fund or investment. Instead of directly investing in bonds or stocks or other securities, a fund manager makes a portfolio of mutual funds or opts for a particular fund or ETF to invest in. The underlying funds for FOFs are either from the same fund house or other fund houses. It aims to achieve sound asset allocation and appropriate diversification. They also invest in a scheme that may not be easily accessible by the general public.
It attracts investors who want to explore different markets and take exposure to unorthodox investments. FOFs have managed actively, and they undergo frequent reallocation of underlying funds to stay up to date with fluctuations of the market. The FOFs offered in India belong to the same fund house. In the instances where investment is made in unaffiliated (FOF investing in a different AMC/fund house) mutual funds, it attracts a higher cost when compared to the investment made from a specialist. It is majorly because of the additional cost for investment management research.
TYPES OF FOF
1. International FOF:
These FOFs invest in MF that have exposure to bonds and shares of global companies and institutions
2. Gold FOF:
This FOF invests in stocks or physical gold of companies that are into gold mining.
3. Asset Allocator Funds:
These invest in a variety of asset classes, ranging from debt to equity to others such as gold, commodities, and other metals.
4. Multi-manager FOF:
These have multiple funds that are professionally and skillfully managed in one single portfolio.
MERITS OF INVESTING IN FOFs
1. Benefit to small investors:
FOFs are ideal for investors having low capital available for investing. These allow them to invest in multiple funds (in the case of asset allocator FoF) at the same time which in turn would have been an expensive venture to invest individually.
2. Management services:
FOFs require a manager with an excellent track record and experience, this makes sure that a credible person maintains the funds. FOFs offer professional management and expertise, where it provides a fund that is backed by research.
3. Feasibility and convenience:
Since FOFs invest in other funds, tracking their NAV is simple as it is just one folio. Reviewing and managing them is a lot easier compared to multiple individual funds.
FOF CHARGES AND FEES
FOFs have a higher expense ratio. FOFs charge management fees in the rendered service for asset allocation. Compared to usual fees, this fee is generally high. The annual report of these funds clearly quoted all the applicable charges incurred during the operation of the fund. While investing, it is quite important to take into calculation the total expense as it has a direct impact on the returns of investment.
WHO SHOULD INVEST IN FOFs?
Investors who aim to capitalize from investment in a multitude of mutual fund schemes or gaining exposure to markets or instruments they can’t access easily can opt for FOF and achieve their goals. These individuals can really benefit from the multi-management and diversification facets of FOFs. Since there is considerable allocation to equity securities, investors should have a moderate risk appetite to go forward with FOFs.
DEMERITS OF FOFs
1. High expense ratio:
Similar to other plans, FOFs too incur expenses but these are higher when compared to mutual funds. In addition to the management fee and administration fee, there are expenses related to the underlying funds or ETFs.
As Asset Allocator FOFs invest in multiple funds, there is a high probability that these underlying funds are investing in similar securities and stocks. Therefore this might reduce the extent of diversification opportunities.
TOP FOFs TO INVEST IN
- DSP US Flexible Equity
- Quantum equity FOF
- Nippon India Gold Savings
- IDFC Asset Allocation FoF
- Franklin India Life Stage FoF - the 40s
HOW TO INVEST IN FOF?
There are two ways through which investors can invest in FOF:
This traditional model of investment requires an investor to fill a form and submit it at the nearby branch of the AMC or invest through a certified broker.
Investors can invest in FOF online seamlessly through our ZFunds platform and app or directly through the website of the AMC offering the fund.